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Goldman Sachs (GS) Smashes Through Even Most Optimistic Q2 Earnings Estimate

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July 14, 2009 8:40 AM EDT

The Goldman Sachs Group, Inc. (NYSE: GS) reported Q2 EPS of $4.93, or $5.71 excluding a one-time preferred dividend related to the repurchase of the firm's TARP preferred stock, well above the consensus of $3.54 and even above the "street high" EPS estimate of $4.65 from Meredith Whitney. Revenues rose 46% to $13.76 billion, versus the consensus of $10.66 billion.

Annualized return on average common shareholders' equity (ROE) (1) was 23.0% for the second quarter of 2009 and 18.3% for the first half of 2009.

Some highlights for the quarter from Goldman Sachs:

Equity underwriting produced record quarterly net revenues of $736 million, surpassing the previous record set in the second quarter of 2000.
Fixed Income, Currency and Commodities (FICC) generated record quarterly net revenues of $6.80 billion, reflecting strength across most businesses, including record results in credit products.
Equities generated record quarterly net revenues of $3.18 billion, reflecting strong results across the client franchise businesses.
Book value per common share increased approximately 8% during the quarter to $106.41 and tangible book value per common share increased approximately 10% during the quarter to $96.94.

CEO Lloyd C. Blankfein said, "While markets remain fragile and we recognize the challenges the broader economy faces, our second quarter results reflected the combination of improving financial market conditions and a deep and diverse client franchise. Our role as an intermediary focused on making markets for buyers and sellers helped drive our performance. We were also active as an underwriter of many significant debt and equity offerings for clients."

Net Revenues:
Investment Banking: Net revenues in Investment Banking were $1.44 billion, 15% lower than the second quarter of 2008 and 75% higher than the first quarter of 2009.

Net revenues in Financial Advisory were $368 million, 54% lower than the second quarter of 2008, primarily reflecting a significant decline in industry-wide completed mergers and acquisitions.
Net revenues in the firm's Underwriting business were $1.07 billion, 21% higher than the second quarter of 2008, due to significantly higher net revenues in equity underwriting, as well as higher net revenues in debt underwriting.

Trading and Principal Investments: Net revenues in Trading and Principal Investments were $10.78 billion, 93% higher than the second quarter of 2008 and 51% higher than the first quarter of 2009.

Net revenues in FICC were $6.80 billion, significantly higher than the second quarter of 2008.
Net revenues in Equities were $3.18 billion, 28% higher than the second quarter of 2008, reflecting significantly higher net revenues in derivatives and, to a lesser extent, principal strategies.
Principal Investments recorded net revenues of $811 million for the second quarter of 2009.

Asset Management and Securities Services: Net revenues in Asset Management and Securities Services were $1.54 billion, 28% lower than the second quarter of 2008 and 6% higher than the first quarter of 2009.

Asset Management net revenues were $922 million, 21% lower than the second quarter of 2008, reflecting lower assets under management, principally due to market depreciation since the end of the second quarter of 2008. During the second quarter of 2009, assets under management increased $48 billion to $819 billion, due to $42 billion of market appreciation, primarily in equity and fixed income assets, and $6 billion of net inflows.
Securities Services net revenues were $615 million, 38% lower than the second quarter of 2008. The decrease in net revenues primarily reflected the impact of lower customer balances compared with the second quarter of 2008.

Expenses: Operating expenses were $8.73 billion, 33% higher than the second quarter of 2008 and 28% higher than the first quarter of 2009.

Compensation and benefits expenses (including salaries, estimated year-end discretionary compensation, amortization of equity awards and other items such as payroll taxes, severance costs and benefits) were $6.65 billion, which was higher than the second quarter of 2008, primarily due to higher net revenues. The ratio of compensation and benefits to net revenues was 49.0% for the first half of 2009. Total staff decreased 1% during the quarter.
Non-compensation expenses, excluding consolidated entities held for investment purposes (7), were $1.80 billion, 8% lower than the second quarter of 2008 and 11% higher than the first quarter of 2009. The decrease compared with the second quarter of 2008 was attributable to lower brokerage, clearing, exchange and distribution fees, principally reflecting lower transaction volumes in Equities

UPDATE: Click here to see some highlights from Goldman's heated Q2 conference call.