Goldman Sachs (NYSE: GS) Earnings Show Investment Banking Growth; Stock Rises

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Goldman Sachs Group Inc. (NYSE: GS) stock is up today (Tuesday) after GS earnings surprised Wall Street with a strong beat. The investment powerhouse reported second quarter results before Tuesday's opening bell.

gs earningsThe healthy numbers sent Goldman shares climbing 1.69%, or $2.61, to $169.98 right out of the gate.

Earnings per share rose 9% to $2.04 billion, or $4.10 a share, compared with $1.93 billion or $3.70 in the year-ago quarter. That was comfortably above the $3.05 per share analysts were looking for. Revenue jumped 6% year over year (YOY) to $9.13 billion, also handily above the $7.97 billion forecast.

The big surprise was the big jump in Goldman's investment and lending business. Analysts had expected weak revenue from stock and bond trading, as well as tepid income from lending, to hamper results.

GOLDMAN SACHS GROUP
NYSE: GS
Jul 25
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Price: 175.40 | Ch: -0.86 (-0.5%)

You see, the spring home-buying season hasn't been as robust as expected. And, amid less volatile markets, trading profits have been shrinking steadily for the last three quarters. Traders need strong market trends, up or down, to make money.

But defying pessimists, revenue in GS's investing and lending units rose a hefty 46% to $2.07 billion. Stock and bond underwriting kicked in 14% of Q2's revenue - the highest portion since 2000.

Fixed-income, currency, and commodity trading revenue came in at $2.22 billion, surpassing estimates that ranged from $1.79 billion to $2.1 billion.

For 2014's first half, Goldman's investment banking fees climbed to a record high.

While bond trading revenue dipped 9%, that was still well ahead of the 24% decline expected. It was also much better than the 15% drop JP Morgan Chase & Co. (NYSE: JPM) today reported in its fixed-income arm.

Compensation and benefits, Goldman's biggest expense, rose 6% year over year to $3.92 billion in Q2. Headcount ticked up 2% from a year ago to 32,400, yet that figure was down 1% from Q1.

The firm paid an effective tax rate of 30.3% in the first half of 2014, down from 32.7% from the same period in 2013. The decline was due to Goldman's decision to permanently invest some non-U.S. earnings abroad, resulting in a change in the way Goldman tallies up its earnings.

"We are pleased with our results for the quarter in the context of mixed operating conditions during the period," Chief Executive Officer Lloyd Blankfein said in a statement. "This performance was driven by the diversity, strength, and breadth of our global client franchise. Good client activity in Investment Banking and Investment Management as well as a better environment for our Investing and Lending activities helped offset less favorable conditions for Institutional Client Services."

Expectations for second quarter bank earnings overall remains muted.

A FactSet survey of analysts' estimates show the group's collective earnings falling 3.2% in Q2 from a year ago. It's the only one of 10 sectors in the Standard & Poor's 500 Index expected to show a decline.

Wednesday brings results from Bank of America Corp. (NYSE: BAC). The struggling bank is expected to post EPS of $0.29, down from $0.32 in the same quarter a year ago. Also reporting Wednesday is U.S. Bancorp (NYSE: USB). Expectations are for USB to report EPS of $0.77, up a penny YOY.

Thursday we'll hear from Morgan Stanley (NYSE: MS). The N.Y.-based investment bank could also surprise to the upside. But expectations are already running high. MS is expected to report Q2 EPS of $0.56, up from $0.45 in Q1 of 2013.

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