One thing that is clear from Goldman Sachs (NYSE: GS) Q3 results is that it’s time for the investment bank to stop viewing its commodities trading unit as the money-minting machine it was before the recession. Much has changed in the global regulatory environment since 2008, and if the fact that all of Goldman’s US investment bank peers closed their commodities units in 2014-15 was not reason enough to convince the bank of this change, then the unit’s low income in each of the last three quarters certainly should be. It should be noted that Goldman characterized the second quarter of 2017 as “worst quarter ever“for the commodities unit, and mentioned that an important reason for the sharp decline in its total trading revenues for the third quarter of 2017 compared to the third quarter of 2016 was”significantly lower net income in raw materials. “Goldman must probably start looking elsewhere for its future growth.
Goldman’s future growth is expected to focus on more stable revenue streams like its investment management business. Goldman has done well on this front since its acquisition of GE Capital Bank in mid-2015. The bank currently offers one of the highest interest rates in the country on its online savings account, loans online only via its Marcus platform, and online retirement savings products via Honest Dollar, and is looking to expand its offerings outside of the United States next year. More recently, Goldman announced its intention to enter the US mortgage industry through its acquisition of the mortgage lender Genesis Capital.
Given Goldman’s push into retail banking and its success in the rapidly growing ETF industry, we’ve increased our estimate of the Goldman share price from $ 230 to $ 245. The new price estimate is slightly ahead of the current market price.
See Trefis’ full review for Goldman Sachs
The table above summarizes the factors that helped Goldman’s pre-tax profit for the third quarter of 2017 compared to the numbers for the third quarter of 2016 and the second quarter of 2017. The sharp reduction in sales and trading revenues compared to the last year’s period was expected, as extremely low volatility in global financial markets hurt trading volumes. But bullish investment banking fees and large gains in the bank’s investment portfolio softened the impact of that on revenue – allowing Goldman to report its highest quarterly revenue since the second quarter of 2015.
The table below details the evolution of Goldman’s investment banking income for the third quarter of 2017 compared to the third quarter of 2016 and the second quarter of 2017.
As seen here, revenues for three of Goldman’s five investment banking units were lower than in previous comparative periods. The sequential improvement in FICC trading earnings is explained by the fact that Goldman suffered huge commodity trading losses in the second quarter of 2017. The equity trading desk also succumbed to the historically low volatility of the stocks. American stock markets. Goldman’s mergers and acquisitions advisory unit was particularly optimistic, as advisory fees of $ 911 million for the quarter were the second highest since 2008 (after $ 961 million in the first quarter of 2015).
Another bright spot in Goldman Sachs results was the strong fundraising for its investment management unit. In the current reporting structure, Goldman integrates its retail banking products, such as loans and deposits, with all assets under surveillance. Improving stock market valuations supplemented the inflows to help Goldman’s total assets under watch reach a record $ 1.46 trillion by the end of the third quarter. The table below summarizes the factors that have contributed to the change in the size of investment management assets from the end of Q3 2016 and Q2 2017.
Going forward, we believe Goldman’s online savings accounts will be the biggest growth segment as the bank expands its portfolio of retail banking offerings. You can see how the changes to the total asset base impact our price estimate for Goldman by modifying the chart below.
See the interactive institutional research (powered by Trefis):
Large global capitalization | US Mid & Small Cap | European large and mid caps
More Trefis research