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The trend of earnings surprises in the U.S. money center banks continued when Goldman Sachs (NYSE:GS) reported a better-than-expected performance for the third quarter of the current year. Like JPMorgan (NYSE:JPM) and Citigroup (NYSE:C), earnings and revenues of Goldman Sachs exceeded their respective expectations. As demonstrated by the table below, earnings per share of $2.85 exceeded expectations of $2.12 by a significant 34%. Revenues of $8.35 billion beat consensus expectations of $7.3 billion by 14%. Much of the improvement in the results was associated to gains on investments of bonds and stocks, as revenues from investment banking surged sharply. However, the stock remained largely flat after the disclosure of its performance, which leads us to conclude the fact that much of the improvement in results was already priced in.

Revenues of $8.35 billion increased by 26% and 133% when compared both sequentially and to the same quarter of the previous year, respectively. The impact of increased revenues translated into a bottom line of $1.5 billion, which is 57% above the linked quarter. At the end of the third quarter of the last year, the bank made a loss of $393 million.

The bank relied heavily on non-interest income for the improvement in revenues. Non-interest revenue for the third quarter of the current year surged 36% quarter over quarter to $7.5 billion against $2.2 billion at the end of the same quarter of the last year. Much of the improvement in the non-interest income was a result of a 26% sequential surge in revenues from market making.

Segmental Review

Revenues of $1.2 billion from Investment Banking saw a significant surge of 49% as compared to the revenues of the same segment a year ago. The bank made significant advances in both equity and debt underwriting. Revenues of $189 million from equity underwriting advanced 110% compared to the same period of the prior year, while revenues of $466 million from debt underwriting surged 177%, compared to the same period. Revenues of $509 million accruing from financial advisory declined moderately from a year ago.

The top line of $4.18 billion from Institutional Client Services surged 8% and 3% when compared to the linked quarter, and to the same quarter of the previous year. Revenues from Fixed Income, Currency and Commodities Client Execution and Equities client execution led the improvement in the revenues from the segment. $2.2 billion revenues from Fixed Income, Currency and Commodities Client Execution surged 28% from a year ago, reflecting higher net revenues in credit and interest rate products, and higher revenues from mortgages. Revenues of $847million from Equity client execution advanced 66% sequentially. However, they were moderately below from a year ago.

The turnover of $1.8 billion from the Investing and Lending segment surged significantly when compared to the linked quarter. An increase in global equity prices and tighter credit spreads were considered to be the reason for such a surge.

The results from Investment Management remained disappointing when compared to prior periods. Revenues of $1.2 billion from the segment were 10% and 2% below the linked quarter, and the same quarter of the previous year, respectively. This was the result of lower management and other fees and lower transaction revenues.

The bank maintained a strong capital base as represented by its Basel 1 capital ratios. At the end of the third quarter, the bank possessed a Tier 1 capital ratio of 15% and a Tier 1 common capital ratio of 13.1%. Comparatively, JPMorgan, the largest bank by assets, had a Tier 1 capital ratio of 11.9% and a Tier 1 common capital ratio of 10.4%.

In conclusion, we don't recommend a long position in the stock as it is trading in close proximity to its 52-week high and a lot of good news has already been priced in. The stock is up 28% since the beginning of July this year. The bank suspended its premier graduate program recently. Analysts have revised down their fourth quarter earnings estimates from $3.41 per share to $3.02 per share over the past 90 days.

Source: Goldman Sachs: The Good News Is Already Priced In