Goldman Sachs (GS) is gaining ground Wednesday morning after reporting strong fourth quarter earnings pre-market.
Shares of the New York-based bank bounced 4% immediately after the release and is sustaining the bump following a report reflecting earnings per share of $6.04 and revenue at $8.08 billion. Both figures beat the FactSet consensus estimates set at $5.02 per share in EPS and revenue of $7.5 billion.
"The increase in net revenues compared with 2017 was primarily due to significantly higher incentive fees, as a result of harvesting," the company said in a presentation release. "Management and other fees were also higher, reflecting higher average assets under supervision and the impact of the recently adopted revenue recognition standard, partially offset by shifts in the mix of client assets and strategies."
The firm touted its number one ranking in completed mergers and acquisitions, equity and equity-related offerings and common stock offerings for the year as a major driver of the strong figures.
Investment banking net revenues promoted the highest net revenues in Financial Advisory since 2007 while ROE charted the highest since 2009, the company said. The big bank recorded record net interest income in debt securities and loans of approximately $2.70 billion.
The results overall beg questions of the analyst consensus on EPS, which had drifted as low as $4.30 per share shortly before the release.
Buying High?
One aspect of the earnings release that could sting is the fact that the firm repurchased 13.9 million shares of common stock at an average cost per share of $236.22, for a total cost of $3.29 billion in 2018.
The share price, now sitting $50 lower than the cost basis, will likely take a considerable amount of time to justify the big buy-in.
Tangible book value per common share currently sits at $196.64 per share, per the company's fourth quarter release.
Also, net revenues in FICC Client Execution were $822 million, 18% lower than the fourth quarter of 2017, reflecting significantly lower net revenues in credit products and lower net revenues in interest rate products. The pain in the segment joins the chorus of banks reflecting down performance in these credit connected products.
Scandal Still a Scare
The major concern investors have been eyeing on the earnings release remains the 1MDB scandal that could present major litigation risk to the firm moving forward.
The scandal began after former Prime Minister of Malaysia Najib Razak contracted Goldman to manage bond deals that raised $6.5 billion between 2012 and 2013, and took fees of at least $600 million, nearly 10 times the normal rate.
GS shares are down by nearly 35% this year and have fallen from more than $250 to less than $170.
Malaysia, as well as the U.S. Department of Justice, say most if not all of the money was stolen or laundered for the raise.
Malaysia is requesting $7.5 billion, which is equivalent to the bond proceeds plus $1 billion in a penalty fee. So far, Goldman has only set aside $1.8 billion to settle these claims.
"The 1MDB bond offerings were meant to raise money to benefit Malaysia; instead, a huge portion of those funds were stolen for the benefit of members of the Malaysian government and their associates," GS said in a statement in 2018. "Certain members of that government and 1MDB lied to Goldman about the use of proceeds from these transactions."
Given the reputational risk, the company has enlisted David Solomon to join the call, breaking with Goldman tradition of excluding the chief executive from proceedings.
Solomon, who recently took over for long time CEO Lloyd Blankfein, will be seeking to quell last year's slide for the stock that took the share price from about $235 per share in November to around $180 per share in pre-market.
Calming comments from him on the company's earnings call at 9:30 a.m. on Wednesday will be pivotal for the company's trajectory this year.
"If management provides guidance on the 1MDB damage, investors will become better equipped at quantifying the potential impacts of the liability, thereby allowing the stock to have a much cleaner setup for 2019," Jim Cramer's Action Alerts PLUS team commented ahead of the release.
Whether that set up is clean or messy will come down to what wisdom Solomon can share on the much-anticipated call. To listen in, click here.
(Goldman Sachs is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells GS? Learn more now.)
