Average Third Quarter for Goldman Sachs

In context, the third quarter was average. The $8.2 billion of revenue for the quarter was roughly on par with the quarterly average from 2012 through 2015. It only really looks good compared with the third quarter of 2015, up 19%, as the third quarter of 2015 was running at arguably less than half of normal for the investing and lending segment and two thirds for fixed-income, currencies, and commodities trading.

We believe that the fourth quarter will be a material swing factor for the year for two reasons. The first is that year to date, Goldman’s net revenue of $22.4 billion is about the lowest first three quarters of a year since 2011. Second, the company’s year-to-date compensation accrual is 41% compared with 40% the previous two years. This could be a signal that if there’s a low-revenue fourth quarter, the yearly compensation ratio will be above the approximately 37% of the last several years. Looking at the commentary from some of the other banks and the low revenue levels of the third quarter of 2015 through the first quarter of 2016, the current quarter and year may disappoint.

Longer term, Goldman Sachs’ online lending could cause a positive shift to higher-quality net interest income from investment banking and trading.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.