Goldman Sachs reports better-than-expected Q4 earnings

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Goldman Sachs (GS) announced upbeat corporate performance based on its earnings results for the fourth quarter of 2018 (4Q2018), beating market expectations despite the ongoing fund fraud scandal in Malaysia, which is currently under investigation by both Malaysian and U.S. authorities.

In his observations on the recent business operating environment, David Solomon, chairman and CEO of GS, pointed out "quite a disconnect" between weak market sentiment and the optimism the firm continued to see in the corporate board rooms.

"Fourth quarter, particularly in December, was characterized by a decline in the investor sentiment with respect to the global growth outlook," Solomon said during a quarterly results conference call on Wednesday.

"A concern that central banks will continue to tighten and a slowing growth environment caused weakness in equity and credit markets. The results increased volatility in many macro aspects," he noted. "While this created challenges for many of our institutional investing clients, it is also driving potential future opportunities for active managers to add value."

Upbeat earnings boosted by M&A

The New York-based multinational investment bank and financial services company posted a net revenue of 8.08 billion U.S. dollars for the quarter, well above analysts' estimates of 7.54 billion U.S. dollars, down eight percent from the third quarter last year, according to its quarterly report on earnings results released on Wednesday.

It also posted adjusted earnings per share (EPS) of 6.04 U.S. dollars, exceeding analysts' expectations of 4.53 U.S. dollars a share, yet falling 4 percent quarter on quarter (QoQ). EPS is a key barometer of a company's profitability, referring to the portion of the company's profit distributed to each share of its stock.

Shares of GS extended solid gains throughout Wednesday, with the biggest daily increase hitting nearly 10 percent, which pushed its stock price to a day high of 198.15 U.S. dollars per share.

The weaker yet better-than-expected quarterly earnings results were largely underpinned by the strong growth in GS' merger and acquisition (M&A) completed transactions in 4Q2018, one of the three main financial advisory services in the firm's investment banking business.

Among the six key business operations of GS, investment banking posted the only increase for the quarter, up three percent QoQ to 2.04 billion U.S. dollars.

The other five operations include fixed income, currencies and commodity, equities, institutional client services, investing and lending, as well as investment management.

In particular, financial advisory service, powered by the massive M&A transactions, recorded a sharp growth of 31 percent in 4Q2018, offsetting the negative growth rates of the aforementioned key operations, which reflects progress in the broadening of the the company's client coverage.

"We ranked No. 1 in announced and completed global M&A for both the fourth quarter and the full year. We advised on nearly 400 transactions that closed during the year, representing approximately 1.2 trillion dollars of deal volume," said Stephan Scherr, chief financial officer (CFO) of GS, during the conference call.

Although topping market forecasts, GS' fourth-quarter net revenues in the aggregate posted a sharp loss of eight percent QoQ, due to "significantly lower net revenues in credit products and lower net revenues in interest rate products," according to the quarterly earnings report.

"We will remain focused on expanding addressable market by broadening client relationships, streamlining expenses, optimizing capital and investing in automation and platform enhancements," the CFO said.

CEO's apology to Malaysian people

During the conference call, Solomon apologized to the Malaysian people for an investment fund fraud of billions of dollars, which was committed by a Malaysian financier and other officials through the help of a former Goldman banker.

The sovereign wealth fund 1Malaysia Development Berhad (1MDB) was originally set up to invest in Malaysia's infrastructure. The U.S. Department of Justice (DOJ) released a guilty plea of Tim Leissner, the ex-Goldman banker, for money laundering on Nov. 1, 2018. At least 4.5 billion U.S. dollars was pocketed from the fund.

Weighed down by the scandal, shares of GS dived 34 percent last year, marking the financial institution's worst yearly performance among the major banks in the United States.

GS has been under investigation by Malaysian authorities and the DOJ for its role as the underwriter and arranger of three bond sales to help raise 6.5 billion U.S. dollars for 1MBD.

"It's very clear that the people of Malaysia were defrauded by many individuals, including the highest members of the prior government," Solomon said at the beginning of the conference call.

"Tim Leissner, who was a partner at our firm, by his own admission was one of those people," Solomon said. "For Leissner's role in that fraud, we apologize to the Malaysian people."

Solomon said although the fraud scandal has undermined GS' reputation, its overall impact on the company's relationships with clients remained limited. "This has been a difficult time, but I'm proud about how our firm has remained focused on our clients."

GS' net revenues for 2018 rose 7 percent to 36.62 billion U.S. dollars year over year, as the company also reported its full year earnings results on Wednesday.

The CEO noted they were "pleased" with the the firm's performance in 2018, as it achieved "stronger top and bottom line results despite a challenging backdrop for our market-making businesses in the second half."

Looking ahead, GS was confident as it has been "well positioned to support an even larger universe of clients." "(We will) continue to diversify our revenue mix and deliver strong returns for our shareholders in the years ahead," the CEO said. 

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