Goldman Sachs
Stays Strong while Others Flounder
First:
International revenues (54% of total) remain
favorable with good trends. Also, Goldman
has a unique strategic call option on expanding
Chinese markets.
Second,
Goldman has less exposure to the main industry
problem area of collateralized debt options,
given exposures well below peer (under $1.7B
vs. net $15B at Merrill Lynch net and $42B
at Citigroup supported by a superior ability
to hedge. The main unexpected issue for the
industry has been collateralized debt options.
Other GS areas are performing above average
and beating Lehman significantly. Goldman's
investment in its Alpha fund with a significant
loss this quarter is a detriment.
Third,
Goldman has an earnings cushion given (a)
a likely gain so far this quarter in ICBC
(est. $500 or so million) and (b) likely mark-ups
on previously written down positions in leveraged
loans, helped by better conditions as evidenced
by First Data and TXU.
Becoming
the ONLY Game in Town
Goldman
likely took more conservative write-downs
on its leveraged loans than others (est. 5%
vs. est. avg 3%-4% at peer).
Client
flows, the key variable for earnings, says
CFO Viniar, all but dried up in response to
intense market volatility. Ultimately, though,
money will go to work.
The current credit crunch makes for a difficult
earnings environment for financials. However,
GS has the ingredients to demonstrate the
greatest earnings upside and revenue growth
potential.
GS
maintains a dominant market share in the fastest
growing/highest margin areas of the global
capital markets. GS should continue to benefit
from this over the next several years, and
offers the cheapest option on high-growth
emerging markets.
Goldman
Strongest of Group
Goldman’s
4Q07 overall strong performance outperforms
Lehman’s.
GS’s
YoY% growth for EPS was 6%, beating Lehman’s
11% decline. GS’s ROE of 34.6% bested
Lehman’s 16.6%. Furthermore, GS’s
book value per share YoY% growth of 25% beat
Lehman’s 16%.
GS’s
YoY% growth for total firm net revenue of
14% beat Lehman’s 3% decline.
GS’s
compensation expense grew 31% YoY, much faster
than Lehman’s 3% decline. Non compensation
for GS and LEH were roughly same, growing
YoY at 25% and 23%, respectively. For GS,
within the non-compensation expense was a
$128 million exit costs (occupancy costs)
related to the firm’s office space.
GS’s YoY% growth for net income of 2%
beat LEH’s decline of 12%.
In
Capital Markets, Goldman’s
YoY% growth of 13% beat that of Lehman’s
10%
decline. Goldman’s YoY% growth for Fixed
Income Trading (FICC) of 6% handily beat that
Lehman’s 60% decline. Lehman’s
107% YoY equities revenue growth was much
stronger than Goldman’s 22%.
In
Investment Banking, Goldman was the
top performer at 47% YoY growth vs. Lehman’s
3% decline. GS’s strong performance
was driven primarily by the remarkable performance
in Advisory. Goldman’s YoY% growth for
Advisory was a 98% increase, beating Lehman’s
52% increase. Goldman’s YoY% change
for debt underwriting revenues was a 15% decline,
better than Lehman’s 38% decline. Goldman’s
Equity Underwriting revenues increased 22%
YoY, beating Lehman’s 6% YoY decline.
In
Asset Management, GS’s assets
under management grew 28%, beating Lehman’s
7%. During 4Q07, new inflows for Goldman were
a record $58 billion, beating Lehman’s
$2 billion. As of the end of 4Q07, assets
under management for Goldman and Lehman were
$868 billion and $281 billion, respectively.
Goldman’s YoY% growth for Asset Management
net revenues of 29% was in line with that
of Lehman’s 30% increase.
Risk
Market
Risk: Brokerage earnings are
highly correlated to strength/weakness in
the overall capital markets.
Credit
Risk: Brokerage earnings may
be vulnerable to losses from their credit
exposure related to trading, lending, and
other business activities.
Liquidity
Risk: An extended interruption
in liquidity would have a materially adverse
impact on earnings.
Litigation
Risk: Legal proceedings could
adversely affect brokerage earnings, capital
levels, and potentially impact credit ratings.
Regulatory
Risk: Most brokerage businesses
are highly regulated and could be materially
impacted by regulatory and/or legislative
initiatives globally.
