Goldman Sachs smashes analysts' estimates on stronger-than-expected inventory buying and selling and funding banking

David Solomon, Chairman of the Board of Directors of Goldman Sachs & Co., speaks during an interview with Bloomberg Television at the Milken Institute Global Conference in Beverly Hills, California, USA, on Monday April 29, 2019.

Patrick T. Fallon | Bloomberg | Getty Images

Goldman Sachs exceeded analyst expectations for fourth quarter earnings and sales on Tuesday due to the strong performance of the company's stock traders and investment bankers.

The bank posted earnings of $ 12.08 per share, breaking the $ 7.47 estimate of analysts surveyed by Refinitiv. Sales of $ 11.74 billion exceeded expectations by approximately $ 1.75 billion.

The shares of the New York-based bank rose 2.4% in premarket trading.

"We have been able to help our customers navigate a challenging environment and as a result have strong results across the franchise while driving our strategic priorities," said David Solomon, CEO of Goldman, in the press release. "We hope this year brings much-needed stability and a break from the pandemic, but we remain poised to deal with a variety of outcomes and ready to serve our customers' needs."

The expectations of Solomon were high. Last week, JPMorgan Chase posted record trading and advisory results in the fourth quarter that helped the bank beat earnings estimates.

At Goldman, stock traders saw revenue grow 40% year over year to $ 2.39 billion, surpassing the estimate of $ 1.89 billion by roughly $ half a billion. Like most of its competitors, the fixed income business fell short of expectations for the quarter, posting revenue of $ 1.88 billion, which is below the estimate of $ 2.06 billion.

Investment banking revenues rose 27% to $ 2.61 billion, beating the estimate of $ 2.15 billion. This is due to higher income from subscribing for shares and completed mergers.

"Goldman Sachs' profits were shockingly good," said Octavio Marenzi, CEO of capital market management consultancy Opimas. "We expected a strong performance, but Goldman has outperformed almost all of its businesses. Goldman's activities are focused entirely on investment banking and trading, areas that did well everywhere but particularly well at Goldman."

Of the six largest US banks, Goldman derives most of its revenue from Wall Street activities, including trading and investment banking. This has been a disadvantage for the company in recent years as retail banking has driven the industry's record profits. Now Goldman's model is proving to be an advantage.

Wide-open markets should help usher in the best year for trading on Wall Street since the financial crisis, thanks to unprecedented actions by the Federal Reserve earlier in the year. Meanwhile, investment bankers are benefiting from increasing demand for IPOs and a record rate of debt issuance.

In fact, Goldman's investment banking division had record sales of $ 9.42 billion in 2020 thanks to increased underwriting of stocks and bonds. And the company's commercial division posted its highest annual turnover in a decade last year, a 43% increase over 2019 as activities in the various markets have soared.

Goldman shares rose 11% in 2020, outperforming the KBW Bank Index's 4.3% decline.

Here are the numbers:

Earnings: $ 12.08 per share versus $ 7.47 per share, according to Refinitiv.
Revenue: $ 11.74 billion versus $ 9.9 billion.

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