Goldman Sachs shares advanced Wednesday after the firm posted fourth-quarter profit that exceeded expectations on strength in its investment banking and investing and lending divisions.
The bank generated $6.04 per share in profit for the fourth quarter of 2018, versus the $4.45 per share estimate of analysts surveyed by Refinitiv. Excluding the impact of the U.S. corporate tax overhaul, the New York-based bank posted profit of $4.83 per share. Revenue of $8.08 billion also beat the $7.55 billion estimate.
The bank's shares rose 9.54 percent on Wednesday, their biggest one-day gain since 2009. The stock also posted its best earnings reaction since December 2008, according to Bespoke Investment Group.
While analysts had feared that plunging markets late last year would punish Goldman's trading and investing divisions, the bank demonstrated that its relationship-based businesses and areas with relatively more recurring revenues were gaining in prominence.
"If you had this environment a decade ago, their results would've been far worse," said Devin Ryan, a JMP Securities analyst. "Even in a market where you had the S&P 500 down 14 percent last quarter and credit spreads widening, they were still able to generate an over 12 percent return on equity. The investment banking is doing incredibly well."
The bank posted $2.04 billion in revenue in its investment banking division, better than then $1.88 billion estimate, fueled by a 56 percent surge in advisory revenue to $1.20 billion. Goldman Sachs is Wall Street's pre-eminent mergers adviser, and the firm cited an increase in completed deals in the quarter.
But the lion's share of Goldman's revenue beat appeared to come from the bank's investing and lending division, which contains a grab-bag of businesses from consumer banking to private equity investments and low-income housing projects. The division produced $1.91 billion in revenue, about $550 million in excess of the $1.35 billion estimate.
The bank cited "significantly higher net interest income" from a year earlier in that business tied to its debt securities business, where Goldman lends to big corporate clients. The unit also benefited from $1.26 billion of gains in private equity stakes.
Goldman's trading division produced $2.43 billion in revenue, under the $2.58 billion estimate as fixed income desks generated 18 percent less revenue from a year earlier. The firm's investment management business produced $1.7 billion in revenue, essentially matching analysts' estimate.
"We are pleased with our performance for the year, achieving stronger top and bottom line results despite a challenging backdrop for our market-making businesses in the second half," CEO David Solomon said in a statement.
"We are confident that we are well positioned to support an even larger universe of clients, continue to diversify our revenue mix and deliver strong returns for our shareholders in the years ahead."
Later Wednesday, Solomon addressed analysts on an earnings call for the first time since he took over from Lloyd Blankfein on Oct. 1
He had a lot to discuss: Goldman shares dropped 34 percent last year, the worst performance among the six biggest banks.
Much of that decline happened after the Justice Department unsealed the Nov. 1 guilty plea of an ex-Goldman banker who helped a Malaysian financier loot an investment fund of billions of dollars. That announcement sparked a series of bad news related to the fund, 1MDB, including criminal charges filed by Malaysia and questions about the ultimate liability faced by the bank.
During the earnings call, he apologized to the Malaysian people.
Analysts want to know the extent of costs to resolve 1MDB probes and whether or not the negative attention impacted business operations, according to Jason Goldberg of Barclays.
In the fourth quarter, Goldman's provisions for litigation and regulatory proceedings surged to $516 million from $9 million a year earlier, and most of that is tied to the 1MDB case, according to a person with direct knowledge of the matter.
Furthermore, the market turbulence that pummeled bank stocks late last year also crimped trading and bond and stock underwriting desks. Citigroup, J.P. Morgan and Bank of America were all impacted by declines in bond trading revenue of at least 16 percent.
In October, CFO Stephen Scherr said the firm was undertaking a "front-to-back" review of Goldman's four main divisions to boost shareholder returns. So investors will want to hear if there are any early results from that effort, as well as guidance on 2019 targets and progress on a previously disclosed $5 billion revenue project.