Categories
Articles

Goldman Reports: Good/Bad News

So, the “King of the Hill” for investment banks reported this morning and Goldman Sachs (GS), is still at the top of the heap, it is at the top of a much smaller heap.

Goldman reported “net revenues of $6.04 billion and net earnings of $845 million for its third quarter ended August 29, 2008. Diluted earnings per common share were $1.81 compared with $6.13 for the third quarter of 2007 and $4.58 for the second quarter of 2008. Annualized return on average tangible common shareholders’ equity (1) was 8.8% for the third quarter of 2008 and 16.3% for the first nine months of 2008. Annualized return on average common shareholders’ equity was 7.7% for the third quarter of 2008 and 14.2% for the first nine months of 2008.

Net Revenues

Investment Banking
Net revenues in Investment Banking were $1.29 billion, 40% lower than the third quarter of 2007 and 23% lower than the second quarter of 2008. Net revenues in Financial Advisory were $619 million, 56% lower than a particularly strong third quarter of 2007, primarily reflecting a decrease in industry-wide completed mergers and acquisitions. Net revenues in the firm’s Underwriting business were $675 million, 8% lower than the third quarter of 2007, due to lower net revenues in equity underwriting, primarily reflecting a decrease in industry-wide initial public offerings. Net revenues in debt underwriting were essentially unchanged from the third quarter of 2007. The firm’s investment banking transaction backlog increased during the quarter.

Trading and Principal Investments
Net revenues in Trading and Principal Investments were $2.70 billion, 67% lower than the third quarter of 2007 and 52% lower than the second quarter of 2008. Net revenues in Fixed Income, Currency and Commodities (FICC) were $1.60 billion, 67% lower than a very strong third quarter of 2007, primarily reflecting particularly weak results in credit products and mortgages, which were adversely affected by broad-based declines of asset values. Credit products included very weak results from investments and a loss of approximately $275 million (including hedges) related to non-investment-grade credit origination activities. Mortgages included net losses of approximately $500 million on residential mortgage loans and securities and approximately $325 million on commercial mortgage loans and securities. Commodities produced strong results, which were higher compared with the third quarter of 2007. Net revenues in currencies and interest rate products were also strong, although essentially unchanged from the third quarter of 2007. During the quarter, FICC operated in an environment generally characterized by wider mortgage and corporate credit spreads, volatile markets and lower levels of client activity.

Net revenues in Equities were $1.56 billion, 50% lower than a particularly strong third quarter of 2007. During the quarter, Equities operated in a challenging environment characterized by a significant decline in global equity prices, deleveraging by clients and generally lower client activity levels towards the end of the quarter. The decline in net revenues reflected very weak results in principal strategies. In addition, net revenues in derivatives were significantly lower than a particularly strong third quarter of 2007. Commissions were strong, but lower, compared with the third quarter of 2007. Principal Investments recorded a net loss of $453 million for the third quarter of 2008. These results included losses from corporate and real estate principal investments, partially offset by a $106 million gain related to the firm’s investment in the ordinary shares of Industrial and Commercial Bank of China Limited (ICBC).

Asset Management and Securities Services Net revenues in Asset Management and Securities Services were $2.05 billion, 4% higher than the third quarter of 2007 and 5% lower than the second quarter of 2008.

Asset Management net revenues were $1.13 billion, 6% lower than the third quarter of 2007, reflecting lower management and other fees, as well as lower incentive fees. The decrease in management and other fees primarily reflected the impact of one fewer week in the firm’s fiscal third quarter of 2008 compared with the third quarter of 2007. During the quarter, assets under management decreased $32 billion to $863 billion, due to $25 billion of market depreciation, primarily in equity assets, and $7 billion of net outflows. Net outflows reflected outflows in equity and money market assets, partially offset by inflows in alternative investment and fixed income assets.

Securities Services net revenues were $916 million, 20% higher than the third quarter of 2007. The firm’s prime brokerage business continued to generate strong results and customer balances were higher compared with the third quarter of 2007.”

With the recent demise of Lehman (LEH) and the sale of Merrill Lynch (MER) to Bank of America (BAC) the fact Goldman is still very profitable is a feat in and of itself. With that being said, a 70% fall in profits is lousy in anyone’s book no matter how you look at it.

The bright side is Goldman and Morgan Stanley (MS) are now the last men standing. One has to wonder though if the next run is on them? Goldman is too strong and can resist, Morgan, I just do not know. The scary thing is that I don’t think anyone knows.

One this that could assure either avoids a run would be the acquisition of a depository institution. That would provide a capital base and lessen the total dependence on capital markets.

Which one? Washington Mutual (WM)? JP Morgan (JPM) has been rumored to be sniffing around them but as of yet has not made a move. SunTrust (STI)? Possible..

Here is a thought, is there a reason the two could not merge? Clearly the end entity would be that much stronger and necessary than the two independent…

Just a thought..


Disclosure (“none” means no position):Long GS, none
Visit the ValuePlays Bookstore for Great Investing Books