Highlights From GS's Q1 Conference Call: Net Revenues $11.9 Billion, Net Earnings $2.7 Billion

This morning, Goldman Sachs (NYSE: GS) reported Q1 EPS of $1.56, versus the analyst estimate of $0.82. Revenue for the quarter came in at $11.89 billion versus the consensus estimate of $10.18 billion. The company's Tier 1 capital ratio was 14.6%. Shares are down 1.07% today.

Highlights From GS's Q1 Conference Call:

• (David A. Viniar) Net revenues were $11.9 billion and net earnings were $2.7 billion. Earnings per diluted share were $1.56 and our annualized return on common equity was 12.2%.
  
• Excluding the impact of a $1.6 billion preferred dividend associated with our repayment of the Berkshire Hathaway preferred stock, earnings per diluted share were $4.38 and our annualized return on common equity was 14.5%.
  
• In 2010, many of our clients' strategic and investment decisions were burdened by fears about the global economic outlook. These concerns were focused on many considerations ranging from European sovereign risk to regulatory uncertainty to the potential for inflation in growth markets. Many of the issues facing the broader operating environment in 2010 continued into 2011 with political unrest in the Middle East and the tragedy in Japan adding to their list of concerns.
  
• Despite these broad macro concerns, we experienced increased client activity across many of our businesses within institutional client services during the first quarter although volumes were still generally subdued.
  
• Investment Banking produced first quarter net revenues of $1.3 billion, down 16% from solid fourth quarter results. First quarter advisory revenues were $357 million, down 43% from Q4.
  
• We advised on a number of important transactions that closed in the fourth quarter, including GDF Suez's $25.4 billion merger with International Power; Allegheny Energy's $8.9 billion sale to First Energy Corp. (NYSE: FE); and Intel's (Nasdaq: INTC) $7.7 billion acquisition of McAfee. We're also advisor on a number of significant announced transactions, including Reliance Industry's $9 billion sale of certain assets to BP (NYSE: BP); Beckman Coulter's $6.8 billion sale to Danaher (NYS:E DHR); and Liberty Global's $5.5 billion acquisition of KBW.
  
• First quarter Underwriting net revenues were $912 million, up 4% sequentially. Equity underwriting revenues of $426 million were down 23% from the fourth quarter, reflecting a decline in IPO activity from robust fourth quarter levels. Debt underwriting increased 50% to $486 million, reflecting higher activity across leveraged finance and investment grade markets and a reopening of the CMBS markets.
  
• During the first quarter we participated in many noteworthy underwriting transactions, including Hutchison Port Holding's $5.5 billion IPO; Schaeffler's $2.5 billion sale of a portion of its equity stake in Continental; and J.Crew's $1.9 billion combination bank debt and high yield notes offering. Goldman Sachs ranked first globally in equity and equity related offerings year-to-date. Our Investment Banking backlog increased from year-end levels.
  
• Let me now turn to Institutional Client Services, which is comprised of FICC and Equities Client Execution, Commissions and Fees, and Securities Services. Net revenues were $6.6 billion in the first quarter. Our FICC and Equities Client Execution business improved significantly from fourth quarter levels, driven by a broad based increase in client activity.
  
• FICC client execution net revenues were $4.3 billion in the first quarter, more than doubling sequentially as every major business generated higher revenues.
  
• Our Credit business benefited from high origination activity, particularly in high yield markets. Mortgaged produced solid results on improved volumes largely in our non-agency business.
  
• Turning to Equities, which includes Equities Client Execution, Commissions and Fees, and Security Services, net revenues for the first quarter were $2.3 billion, up 16% sequentially. Equities Client Execution revenues were up 27% to $979 million, reflecting higher net revenues within our Derivatives business.
  
• Commissions and Fees were $971 million, up 13% from Q4 on higher market volumes. Security Services net revenues of $372 million were roughly flat.
  
• Turning to risk, average daily value at risk for the first quarter was $113 million, down 6% relative to the fourth quarter. Lower equity and currency risk was partially offset by higher commodity risk.
  
• Now our investment in ICBC produced a $316 million gain in the quarter. Other equity investments generated net revenues of $1.1 billion across both public and private equity investments. Net revenues in debt securities and loans were $1 billion generated from interest income and a favorable credit market.
  
• Other revenues of $311 million were primarily driven by the firm's investment in consolidated investment entities.
  
• In Investment Management, we reported first quarter net revenues of $1.3 billion, down 16% from the fourth quarter due to seasonally lower incentive fees.
  
• Management and other fees were consistent with the fourth quarter at $1 billion. During the first quarter, assets under management remain unchanged.
  
• Outflows in money market and fixed income assets were offset by $12 billion of market appreciation.
  
• Compensation and benefits expense, which include salaries, bonuses, amortization of prior equity awards and other items, such as payroll taxes and benefits, was accrued at a compensation-to-net revenue ratio of 44%. First quarter non-compensation expenses were $2.6 billion.
  
• Our effective tax rate was 32.3% for the first quarter.
  
• We repurchased 9 million shares of common stock during the first quarter for a total cost of approximately $1.5 billion.
  
• Many headwinds continued to exist for our global businesses, particularly on the macroeconomic front. This leads to a natural ebb and flow of client activity. As a result, the firm continues to operate in an uncertain environment over the near term. However, we believe our ability to generate industry-leading returns for our shareholders remains intact. We remain committed to building and maintaining valued long-term relationships with our clients.
  
• We remain committed to managing our risks prudently and appropriately, balancing risk return decisions. We remain committed to creating long-term value through continued investments in our global footprint, technology and operational infrastructure. And finally, we remain committed to recruiting and retaining individuals who embrace our culture of teamwork and client focus. We understand the importance of these commitments not only to our shareholders but also to our clients, our regulators, our employees and the public at large.
  
• (Q&A) So, David, to your last point, 14.5% ROE on a pretty low leverage. Lower than obviously than you've been but lower than all your peers as well. What do you think holds back picking up leverage a couple of clicks? Is it the SIFI buffer? Is it opportunity? Because it could be pretty impactful at this level of an ROA. (A) think I'd start with opportunity. We're not holding back leverage. They're just - while there was obviously more activity than the fourth quarter, our clients are still cautious given the economic environment, the regulatory environment, other things. And so they just are not - we're taking advantage of opportunities where we see them with our clients. But there aren't that many.
  
• And what can you tell us? I think you gave us on the K, the size of the investing and lending balance sheet but I think the returns on the debt side are harder to track. You give us good 10% market guidance on the equity side. How big is the balance sheet on the debt securities side? and how much of the gain this quarter was credit improvement versus anything else? (A) Well, I said - let me answer the second part of the question first. The gains were a variety of things. First of all, there's interest. We make loans and I would say somewhere between 20% and a quarter is interest. Then it was a combination of things. As you know, it was a very active financing market so there were a lot of restructurings during the quarter. There were a lot of repayments during the quarter. And given that we're a mark-to-market firm, if something was repaid at par and wasn't marked at par, we have gains. So it was just a lot of debt activity, which is beneficial and then there was a narrowing of spreads as well, so all of those things contributed to the gains in that segment. As far as the balance sheet goes - how about if we just get back to you? I just don't have those numbers at my fingers.
  
• Not a problem. One last one. So FICC was obviously good and much improved from last quarter but in the last couple of years, down from '09's highs. Is that once again an issue of client activity and the lower leverage? What can you tell us about bid-offer compression as well? (A) Sure. Now, as you remember, in 2009 and 2010 when we talked about it, I told you those weren't - what was going on in the markets then were not sustainable. I think a very big portion of it was the bid-offer spread and the fact that there was just so little capital in the market to service our clients. And we were there and most others were not. And so we had an incredibly high market share, an unsustainably high market share with unsustainably high bid-offer spreads. And so I think that market share has come back down to what I would call - and I don't like using the word normal - a more normalized level. And bid-offer spreads have come down to a more normalized level.

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