Look at Goldman's 2Q on a normalised basis

Yes, Goldman's 2Q results were exceptionally strong but no, we don't think the outperformance of its securities business can be sustained

Michael Wong, CPA 15 July, 2009 | 2:21PM
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Goldman Sachs yesterday reported net earnings of US$3.44 billion, or diluted earnings per share of $4.93, on $13.76 billion of net revenue for its second quarter. The company reported record quarterly equity underwriting revenue of $736 million and record quarterly fixed-income, currency, and commodity revenue of $6.8 billion. The company's value at risk measurement was just slightly above the first quarter's at $245 million. There was little inflow into the asset-management division, but assets under management increased about 6% because of market appreciation. This was an exceptionally strong quarter for Goldman, as was expected.

Though earnings were strong, it's important to look at Goldman on the basis of normalised earnings. Though this quarter didn't have outsized one-time gains and losses from the revaluation of securities as in many recent quarters, it had abnormally strong results from the primary business operations. Equity underwriting fees broke records that were made during the Internet bubble. We believe pent-up equity underwriting demand and the possibility that future demand was pulled forward contributed to the record equity underwriting. If future demand was pulled forward, then equity underwriting revenue may be muted in the coming quarters.

After Goldman's first-quarter earnings release, we said the outperformance of the fixed-income, currency, and commodity revenue was probably unsustainable; we stand by that. The competitive nature of the securities business will decrease the profitability of Goldman's and every other investment banking firms' trading operations. We are likely to marginally increase our fair value estimate.

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Michael Wong, CPA  Michael Wong is a stock analyst at Morningstar.

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