You can look at Goldman’s results from a variety of distances. Up close, EPS estimates were $2.28 and actuals were $2.85 ($3.33 ex-DVA); $2.85 is more than $2.28 and there’s a dividend increase to boot so, yay there you go.
In the middle distance, you could have some concerns. Core, recurring revenue growth was so-so relative to peers, and costs were high, partly due to pleasing comp accruals, which I guess could concern you if you were a mean ungrateful shareholder and/or a former Goldman employee who for whatever reason is no longer accruing said accruals. Most of the outperformance came from appreciation on investing and lending positions.1
In the far distance, what do you make of it? The most awkward moment of the call for me was when the UBS analyst asked the CFO tag team to try to give him a sense of future Investing & Lending profits. You can’t do that! Investing & Lending is like the stochastic slush fund; revenues were $1.8bn this quarter versus $200 last quarter and ($2.5bn) this time last year. If you could predict those revenues you shouldn’t be a banking analyst. The tag team went like this, paraphrasing wildly:
Viniar: You can’t really do that; it’s driven by market conditions and the performance of our specific investments.
Schwartz: The reframing of our financial reporting was an effort to give you more transparency.
Viniar: I mean, there’s a few hundred million of interest and dividends each quarter, but those are overwhelmed by movements in other positions.
Schwartz: It’s more driven by asset prices.
What is that first Schwartz comment doing there? The Viniar approach is “uncertainty, live with it.” The Schwartz approach is “uncertainty, it lives here, but look at all our recurring businesses over there; we have placed the uncertainty in this tiny box and you don’t have to worry about it.” Or: “we reframed our financial reporting (separating I&L from Institutional Client Services, i.e. flow trading) so you’d stop asking us questions like ‘how much of this I&L revenue is recurring?’”
Elsewhere on the call, Schwartz also took the lead in sounding a favorite Goldman earnings-call theme, pointing out that VaR is down – $81mm, vs $92mm last quarter – not because Giant Hedge Fund Goldman has retrenched on its risk appetite but because Goldman positions are driven by client interests and client risk appetite is down. This is surely true but also not, like, an entirely independent fact in the world; Goldman, one imagines, has something to say – via pricing and marketing axes – about client risk appetite, and right now there doesn’t appear to be an axe on building risk at GS.
All of that is consistent with a view in which the CFO transition hands the reins from Viniar, skilled in terrifying markets and bored with his job now, to Schwartz, whose mandate is to lead GS into the promised land of being a calm, boring, high-multiple provider of client services with recurring revenues, rather than a rapacious hedge fund.
On that view it’s a bit unfortunate that Harvey’s first earnings call was for a quarter that featured outperformance in nonrecurring markets-driven principal businesses and meh performance in client service businesses. That’s okay though. For one thing, I’m inclined to believe Harvey when he talks about things like Goldman standing to benefit from swaps clearing. If your clients aren’t looking for risk, you go sell them safety, by for instance swapping their dodgy bonds for Treasuries to post at swaps clearinghouses.
For another: being a rapacious hedge fund is great! Doing it while distracting attention from it is even better! The important thing is to make money doing it, and so far so good.
The core business IB and ICS (i.e. the IB business ex principal) generated clean revenues of $5.7bn vs. JPM $5.0bn – so $700m better on core clean revenues – a good result. But the main driver for better than expected revenues was Investing and Lending Division at $1.8bn in revenues vs. JPMe $560m. Adjusting for I&L revenues to JPM level, so if you take out $1.2bn and assuming a 30% Cost/Income for this kind of business, the result is not that strong anymore as the pretax adjustment would be $850m. GS beat our clean pretax by $891m, so the numbers are inline despite strong core revenues. This illustrates there has been poor cost management on a group basis as Investing and Lending cost/income should be low.
This is perhaps a perverse way of looking at things – maybe Goldman accrued like a billion dollars in comp for the people who made all that I&L revenue? – but, yeah, I guess the point is that while core revenues exceeded expectations, core expenses probably exceeded by even more.