Goldman heads to $130 as results show real recovery

Despite its decision to lower exposure to risky assets, the bank gave a strong Q1 performance.

By Trefis Apr 24, 2012 12:32PM
Image: Arrow Up (© Image Source/Photolibrary)Goldman Sachs' (GS) better-than-expected earnings show that the business environment for major banks has improved significantly since the beginning of the year.

The strong performance is despite the global investment bank's plans to lower its exposure to risky assets over the period. The bank roped in just under $10 billion in quarterly revenues, which is 64% more compared to the dismal fourth-quarter 2011. This translated to a net income of $2.1 billion.

We updated our price estimate for Goldman's stock from $126 to $128 as the bank revised its quarterly dividend payout by a larger amount than what we earlier estimated.


Debt trading business is looking more like its former self


Goldman Sachs' income statement relies quite heavily on its fixed income, currencies and commodities (FICC) business. The importance is clear from the fact that in the first quarter of 2011, FICC operations roped in nearly half of Goldman's total revenues. It is hence no surprise that the division contributes nearly a third of our estimated value for Goldman, as evident in the chart below.


Goldman's FICC client execution business generated just under $3.5 billion, a good two-and-a-half times the figure for the last quarter. But this number is still 20% below compared to the same period last year. While we had expected Goldman to report FICC revenues close to the Q1 2011 number, the bank's decision to reduce its risky exposure clearly had an impact on its top line.


Goldman Yield on Trading Assets for Bonds Currencies & Commodities

And the upswing in equity markets also helped


Extremely volatile equity markets in the latter half of 2011 hit Goldman's equities business quite hard, and the bank was forced to report substantial losses in all its equity investments. But as the market prices continue to normalize, the bank has been able to show a decent turnaround in its equities trading business too.


Equity trades carried out on behalf of clients helped Goldman raise a little over a billion in cash over the quarter, which is double the figure from last quarter and 7% higher compared to Q1 2011.


Goldman Yield on Equities Trading Assets

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