Goldman Sachs Group (NYSE:GS) has reported earnings above the projections for the second quarter. The bank handily outperformed EPS and revenue projections due to the firm’s continued support of clients in a shifting macroeconomic environment. Operating expenses fell modestly, while net interest income fell short by more than 4%. Looking at the firm’s divisions, Goldman Sachs’ Global Markets division made the most revenue at $6.47 billion.
The company stated that it will increase its dividend by 25% in 3Q22, indicating that the payout is still regularly expanding and may appeal to dividend investors. Goldman Sachs is ranked first in the world for mergers and acquisitions. However, this could be concerning because M&A fell for the first time in eight quarters in 1Q22, continuing to plummet across the industry. Goldman Sachs is slightly expensive, and the stock is down about 17% yearly. Momentum might drive the stock below even farther, especially in a bear market with fewer transactions. As a result, GS stock may not be the greatest choice for investors.
Goldman Sachs Outperformed Q2 Earnings Estimates
On July 18, Goldman Sachs reported second-quarter earnings that exceeded expectations. Revenue came in at $11.86 billion, a 23% decrease from the previous year but a $1.17 billion increase over analyst projections. Normalized EPS came in at $7.73, above expectations by $1.12. The company’s second-quarter ROE was 10.6%, and its ROTE was 11.4%. Operating expenses were $7.65 billion, a decrease from $7.72 billion in the first quarter of this year and $8.64 billion in the second quarter of last year. Compensation and benefits expenses were $3.70 billion in 2Q21, down from $4.08 billion in 1Q22 and $5.26 billion in 1Q22. Net interest income came in at $1.73 billion, falling 4.42% short of expectations.
Goldman Sachs’ overall good second quarter can be better appreciated by delving deeply into how each of the bank’s segments performed. Goldman Sachs’ Investment Banking segment made $2.13 billion in revenue in the second quarter. This decreased by 11% quarter on quarter and 41% year on year. Financial advising revenue was $1.2 billion in 2Q22, up 6% from $1.13 billion in 1Q22 but down 5% from $1.26 billion the previous year. Equity underwriting was $131 million in the second quarter, down 50% from 261 million in 1Q22 and 89% from $1.24 billion in the previous quarter. Decreasing volumes and transactions brought about these changes.
Goldman Sachs’ Global Markets segment made $6.47 billion in sales in the second quarter. This decreased by 18% Q/Q while increasing by 32% Y/Y. FICC revenue of $3.61 billion decreased by 24% quarter on quarter but increased by 55% year on year. Equities revenue of $2.86 billion declined by 9% from the previous quarter while increasing by 11% year on year. Higher fixed income sales resulted from rising interest rates, which made bonds more appealing.
Net revenue from Asset Management was $1.08 billion, up 99% from 1Q22 but down 79% from the previous quarter. The year-on-year decrease reflected net losses in equity investments and much reduced net revenue in lending and debt investments. Higher management and other fees partially offset this. Asset management adjustments in the second quarter can be ascribed to unpredictable global prices, investment losses, and debt securities mark-downs.
Larger fees and higher revenues in private banking and lending can be attributable to changes in Consumer & Wealth Management. The Consumer & Wealth Management division of Goldman Sachs made $2.18 billion in revenue. This was a 25% increase over 2Q21 and a 3% increase over 1Q22 revenues. Wealth management totalled $1.57 billion in the second quarter, a 3% decrease from 1Q22 but a 13% increase from 2Q21. Consumer banking was worth $608 million, up from $483 million in the first quarter of this year and $363 million in the second quarter of last year.
Ranked At The Top Of Mergers and Acquisitions
For the year to date, Goldman Sachs placed first in announced and completed mergers and acquisitions, as well as international equity and equity-related offerings and common stock offerings. The firm is well-known for its mergers and acquisitions, as this is a crucial element of the business. Goldman Sachs also ranked first among all financial advisers in total deal value for mergers and acquisitions in 2020 and 2021. In terms of the total volume of these transactions, the firm ranked third in 2021 and first in 2020.
However, mergers and acquisitions are declining, which could cause problems for Goldman Sachs. In 1Q22, mergers and acquisitions declined for the first time in the previous eight quarters, totaling 2,502 transactions. With mergers and acquisitions falling across the sector, Goldman Sachs may struggle in the coming quarters. However, the company’s book value increased by 2.9% in 2Q22, which is a positive sign for the company’s future.
Valuation
In the second quarter, book value per share climbed to $301.88, while tangible book value per share was $278.75. These indicate book values of 1.04 and 1.13, which are consistent with the company’s historical multiples.
We may arrive at two price goals by multiplying Goldman Sachs’ historical multiples for book value and tangible book value by the newly reported current values of these multiples from 2Q22. Averaging these targets results in a total price target of $309.66. When this price goal is divided by the current share price of GS stock, the downside is 1.64%.
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