The Goldman Sachs Group, Inc (GS) recently reported its first-quarter earnings for 2013. Overall, the results look quite appealing with most of the numbers beating the Wall Street expectations. The company reported a profit of $2.26 billion, an increase by 7% as compared to last year. Revenue for the quarter climbed about 1% to $10 billion. Moreover, the company's biggest expense, compensation, fell 1% to $4.34 billion, which is due to its decreased headcount. Apart from all this, the highlight of the results was its investment banking revenue increasing by 36% to $1.57 billion. Goldman Sachs generates around 16% of its revenue from investment banking. With this growth, the company even surpassed JP Morgan Chase's investment banking revenue of $1.43 billion for the first time in last five years. Let's dig into the stock in detail.
The concern area or an opportunity
Looking at the weaker parts of the results, the trading revenue was down by about 10% on year-on-year basis. However, it was up 18% from the fourth quarter of 2012. This remains a concern area for the company as it derives 51% of its revenue from its trading business. With the growth of online trading platforms, the equity trading revenue is under pressure for the last few years. And, recently the company's fixed-income, commodity and other trading businesses have started feeling the pinch. Moving ahead, Goldman Sachs aims at winning back its market share in the bond trading business. This is a huge opportunity for the company, as there are many banks that are backing out from the bond trading business due to higher costs and regulation issues. This bodes well for Goldman Sachs, because it has the required strength and experience to offer a complete range of trading business. Even though the near term is uncertain, I believe over the long run the company will be able to expand its market share in this sector.
A few days ago, other banks such as Wells Fargo & Company (WFC) and JP Morgan Chase & Co (JPM) also declared their first-quarter results for 2013. Being top originators of mortgages in the country, I believe these two companies will benefit from the improving housing environment.
JP Morgan's earnings grew by about 30% to $6.53 billion as compared to $4.92 billion last year. The better-than-expected numbers clearly show, that despite the $6 billion of trading losses in 2012, JP Morgan is all set to generate good returns for its shareholders. Even though the company had its share of negativity and also has some pending issues to be resolved with Fed, I expect it to get the approval to raise its dividend and to buy back around $6 million of shares next year. JP Morgan's earnings were mainly supported by its investment banking and mortgage segments. Among these, mortgage lending was one of the most favorable aspects for the company in this quarter. This was fueled by lower interest rates from various federal programs. The mortgage lending volume increased by around 37% to $52.7 billion on yearly basis.
On similar lines, Wells Fargo recorded a 22% increase in its first-quarter profits to $5.2 billion as compared to $4.25 billion from last year. After emerging as a leading home loans lender during the financial crisis, the company is now seeing a decline in its home loans business for two continuous quarters. Unlike JP Morgan, Wells Fargo's revenue from home loans decreased by around 15% to $109 billion in this quarter on a yearly basis and 13% on a quarterly basis. On the brighter side, the Federal Reserve has approved the capital plan for Wells Fargo for 2013. It includes increasing its dividend rate to $0.30 per share for the second quarter of 2013 (up from $0.25 in the first quarter). It also includes an increase in the buyback of shares in 2013.
On the contrary, Goldman Sachs has received a restricted authorization for its 2013 capital plan. Under this approval, the company is required to remove certain weaknesses in its plan and resubmit it in the third quarter of 2013. I believe the issues are not that significant and would not stop the company from repurchasing its stock. I expect the company to repurchase around $4 billion of shares in 2013.
These results are another sign of the stabilizing U.S. banking industry, as these banks constitute a significant portion of the industry. In 2013, continuing expense control measures, healthy balance sheets, improving housing sector, growing mortgage activities, etc will make the path smoother for these banks. On the flip-side, the structural changes and stricter regulations can hurt the investor's confidence and can lead to some uncertainty in the short term. In the long term such changes will help in the overall stability and security for these companies.
As far as the stock price is concerned, I feel there is plenty of scope for the upside movement because the prices remain far below their long-term averages. And, till the time the stock prices react favorably to the developments, investors can enjoy their returns via dividend and share buybacks. I recommend a buy rating for all the three stocks discussed above, under a long-term perspective.