Morningstar | Goldman Announces a CEO Change With Strong Second-Quarter Earnings
Narrow-moat Goldman Sachs 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.
We continue to be intrigued by Goldman Sachs' digital, retail banking initiative: Marcus. The company had $153 billion of deposits at the end of the second quarter, so has materially increased its stable, interest rate spread-based business. In the quarter, the company booked more than $625 million of net interest income in its investing & lending segment. With plans to expand its retail banking business internationally and introduction of additional products, such as digital financial planning enabled by Goldman's acquisitions of Honest Dollar and Clarity Money, Marcus should become an area of structural growth over time.
Coinciding with the release of 2018 Comprehensive Capital Analysis and Review results, the company announced that it is increasing its quarterly dividend to $0.85 from $0.80 effective in the second quarter of 2019 and plans to repurchase up to $5 billion of shares in the next four quarters.
For a more in depth take on capital returns in the banking industry and the effects of changing stress test regulations, please see our special report, "New Regulatory Proposals Will Change Stress Test Landscape," published on July 8. For our recent analysis of robo-advisors, please see our June 2018 report, "Robo-Advisor Upgrade! Installing a Program for Profitability."
Goldman Sachs Group is a bank holding company and financial holding company. The company is a global investment banking, securities and investment management firm that provides a range of financial services to corporations, financial institutions, governments and individuals. The company operates in four business segments: Investment Banking, which serves public and private sector clients and provides financial advisory services; Global Markets, which serves its clients who come to the company to buy and sell financial products, raise funding and manage risk; Asset Management, which provides investment services; and Consumer & Wealth Management, which provides a range of wealth advisory and banking services.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
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