Goldman Reaps the Benefits of Diversification
Goldman Sachs GS -0.95% ’ earnings were not only strong and marked solid rebound from last year, but they also highlighted the bank’s success in broadening its business.
The bank put a tough 2017 firmly behind it Tuesday, reporting first-quarter earnings that beat estimates by a wide margin. Revenue rose 25% from a year earlier while earnings per share rose 35%.
Last year Goldman saw sharp declines in fixed income currency and commodities trading, traditionally its strongest business, due to trading mishaps and a client base too dependent on institutional investors. In the first quarter FICC rebounded, with revenue up 23% from a year earlier to $2.07 billion. Chief Financial Officer Martin Chavez said the business has added to its client base.
At the same time, both equities and FICC trading revenue were at their highest quarterly levels in three years. Goldman successfully reduced its dependence on fixed-income trading while fixing the business.
The development of Goldman’s lending business, to both consumers and corporate clients, adds further diversification. The firm took in $918 million of net interest income in during the quarter, up from $516 million a year earlier. This should help make results more stable and predictable, a big benefit to shareholders.
If there is a question still hanging over the stock, it is the uncertain outlook for capital returns. Goldman has already slowed its pace of buybacks for the first half of this year after a tax charge hit its capital cushions. Now some analysts are warning that the Federal Reserve’s proposed tweaks to the annual stress-test process could hit Goldman and Morgan Stanley harder than their universal bank competitors, forcing them to hold more capital.
But with the firm’s return on equity at 15.4% in the first quarter, the highest in over five years, reducing capital levels is not the top priority. Indeed, Goldman’s strong track record of investing in technology and new businesses ought to make shareholders less thirsty for immediate cash payouts.
The bank’s shares fell on Tuesday morning and have been stuck in a range since December, a sign investors are still not convinced of the improvements. If the economy stays good and Goldman keeps broadening its business, the shares could break out of that rut.
Write to Aaron Back at aaron.back@wsj.com