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Goldman Sachs posts earnings beat driven by dealmaking activity

Brian Cheung joins the Yahoo Finance panel to discuss Goldman Sachs' Q3 earnings beat, which saw profits rise on an exuberant quarter full of dealmaking activity.

Video Transcript

JULIE HYMAN: Let's talk about another company that was out with numbers this morning, shall we? That is Goldman Sachs. Our Brian Cheung still on the bank watch here this morning. Are you still standing? Are you still upright here at the end of this week--

BRIAN CHEUNG: Barely. Barely, Julie.

JULIE HYMAN: --Brian?

BRIAN CHEUNG: Thank you.

JULIE HYMAN: Goldman Sachs really interesting here. In particular, as I mentioned at the top of the show, that equities trading number, but overall really just beating estimates here.

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BRIAN CHEUNG: Yeah, I mean, what a bookend to big-bank earnings this week. Goldman Sachs the last of the large six to report, and they really knocked it out of the park on both the top and bottom lines. Consider $13.6 billion on the top line. For the bottom line, EPS adjusted of $14.93. That beat the Street's estimates on both measures.

And the big story, as we were kind of talking about through the course of this week, is really M&A, M&A, and M&A. And that's no surprise when you consider that Goldman Sachs, at least according to Dealogic, was the number-one M&A deal maker over the course of 2021 so far. That explains why they had $1.65 billion in financial advisory revenues for the quarter. Their equity underwriting also very impressive for the quarter. They raked in about $1.9 billion. That's a lot thanks to the IPO activity that we've also seen at the other investment banks like Morgan Stanley as well.

But one major bright spot for Goldman Sachs in this earnings season was really their global markets revenue on the top line surging 15%. When you unpack that, it really wasn't coming from Fixed Income, Currencies, or Commodities, which they usually call FICC trading. It really came from equities, and that's because of the stock-market rise, really, that we saw over the course of that quarter ended September 30. Their equities revenue surged to $3.1 billion.

And, guys, a sobering reminder that when you take a look at all those stats I just gave you-- financial advisory, underwriting, global markets-- those all metrics for Goldman Sachs beat the numbers that Morgan Stanley reported yesterday. So when you talk about this kind of competition between these two large giants, Goldman Sachs coming out the winner for this quarter.

BRIAN SOZZI: Brian, I've really been surprised now that Goldman Sachs ends unofficially the earnings for big-bank season, how these companies have been controlling their expenses. Coming into earnings season, a lot of focus was on them raising pay for workers and other cost increases, but, by and large, I mean, those expenses have been under control, and hence you're seeing these big beats.

BRIAN CHEUNG: Well, they've been under control. I mean, take a look at Goldman Sachs, for example. I believe their efficiency ratio, which is kind of a key metric of the cost by which they were able to get the revenues and the profits that they had, was certainly lower than their peers. So there is definitely a bank-to-bank story here.

But broadly speaking, yes, the banking industry fully aware of the fact that the more kind of sticky revenue sources, which would be the more bread-and-butter loan pipelines for, say, consumer and business loans, especially in the case of those more consumer-facing banks like Bank of America, like Wells Fargo, that simply isn't here yet. The loan growth that a lot of these executives had been hoping for they say are starting to show some green shoots but likely won't kind of manifest themselves until maybe quarter four or quarter one of next year.

But when you take a look at how they're managing their expenses in the meantime, it's not really just the story of, well, we're finding places to cut. There are some dramatic changes happening at these banks when you take a look at, for example, Bank of America where their headcount on a quarter-over-quarter basis was actually about 2,200 people short of where they were in the second quarter of last year. So they're reducing the size of their headcount. Obviously that's saving them labor costs. They're trying to lean into more automation as mobile banking is becoming a big story.

And this has nothing really to do with COVID. There was a lot of chatter in 2019, even as early as 2018 about the big banks really shifting to less of a brick-and-mortar model and more to that digital banking model. You saw Wells Fargo analyst Mike Mayo make these calls for a banking industry that could have 200,000 less people over the next decade, I believe it was. So I think that that's definitely going to be a big story that's agnostic to the pandemic that will likely remain an expense-saving story for this industry.

JULIE HYMAN: Yeah, and interestingly, Bank of America big holder of patents, interestingly enough. Fun little fact about Bank of America.

All right, we are going to leave it there. Thanks so much, Brian.