Strong Results for Goldman Sachs, and a New CEO
We don't expect a material change to our fair value estimate for the narrow-moat firm.
Narrow-moat Goldman Sachs (GS) reported strong second-quarter results and announced that David Solomon will succeed Lloyd Blankfein as chairman and CEO of the firm. Goldman Sachs has made public its strategic vision for the next several years, such as its three-year plan to grow net revenue by $5 billion and digital banking effort, and we see the company staying the course. While we remain modestly skeptical of the $5 billion plan that involves gains in market share, we continue to believe that increases in more stable revenue lines like investment management and net interest income could cause investors to revalue Goldman Sachs higher. We don't anticipate making a material change to our $245 fair value estimate for the company.
We're currently in an environment that's conducive to financial companies reporting strong earnings, and Goldman's 14.1% year-to-date return on equity is proof of that. Total investment banking revenue increased 12% in the first half of 2018, due to increased economic confidence and the passing of U.S. tax reform. Importantly, institutional client services revenue increased 24% with a 32% increase in fixed income trading for the first half. An area of concern for Goldman was its underperforming trading business in 2017, but the recent couple quarters of strength should allay doubts of an impaired trading franchise.
Not only did Goldman have strong revenue growth, expenses remained largely under control. Total net revenue increased 22% for the first half to $19.4 billion, while net income increased 34% to $5.1 billion. Operating margins also expanded to 34% from 32%, partly due to the compensation ratio decreasing to 37% from 41% in the second quarter. The company is practically firing on all cylinders, and we continue to foresee strong results in the following quarters, but it's arguable that we're near the peak of the U.S. capital markets cycle.
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Michael Wong does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.