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Investment banking rescues Goldman Sachs in Q3 2017

The global investment banking giant Goldman Sachs Group (NYSE: GS) reported a better-than-anticipated fiscal 2017 third-quarter results on Tuesday. Goldman Sachs also managed to beat fixed-income, currencies, and commodities (FICC) revenue estimate, while most of the major banks failed to do so.

Additionally, the Q3 results discussed below indicate that the stock, which closed at $236.09 yesterday, will remain bullish in the short-term.

The New York-based lender recorded Q3 2017 revenues of $8.326 billion, up 2% from $8.168 billion in the prior year’s similar quarter.

Due to an increase in the provision for taxes and preferred stock dividends, the net income in the recent quarter declined 3% to $2.035 billion, from $2.100 billion in the same period last year. On a per share basis, earnings increased to $5.02 per share, from $4.88 per share in the year-ago quarter. The Street analysts expected Goldman Sachs to post earnings of $4.17 per share on revenues of $7.54 billion.

Goldman Sachs

The provision for income taxes was $848 million in the third-quarter 2017, an increase of 10% from $748 million last year. During the quarter, Goldman Sachs also spent $93 million on preferred stock dividends. All these factors resulted in a marginal decline in the net income.

Segment wise, Investment banking revenues increased 17% y-o-y to $1.797 billion and beat analysts estimate of $1.63 billion. However, it was more than offset by a 17% decline in Institutional Client Services revenue to $3.120 billion. While Investing & Lending revenue increased 35% to $1.883 billion, Investment Management revenues grew 3% to $1.526 billion. The reported Investing & Lending revenue was the best quarterly performance in three years.

Under Investment Banking Segment, equity underwriting revenue fell 7% to $212 million. Similarly, under Institutional Client Services division, FICC revenue declined 26% to $1.452 billion, but exceeded FactSet analysts estimate of $1.38 billion. Finally, under Investing & Lending division, equity securities revenue jumped 51% to $1.391 billion.

Assets under supervision hit a record high of $1.46 trillion. At the end of third-quarter, the CET1 ratio (Basel III) stood at a healthy 12%. The return on equity was 10.9% for the year and 10.3% year to date. With global core liquid assets of $220 billion, the firm maintained strong liquidity during the third quarter. The Board of Directors also declared a quarterly dividend of $0.75 per share, payable to shareholders on December 28, 2017. Thus, impressive 3Q1 results, despite a decline in the performance of the Institutional Client services segment, is expected to spark an uptrend in the stock of Goldman Sachs.

The stock moves along the ascending regression channel, after bouncing off the 50-period linear weighted moving average, as shown in the image below. Furthermore, the commodity channel index indicator is below -100 level, suggesting the possibility of a rebound in the stock. Thus, we can expect a rally in the stock price.

Goldman Sachs Stock Price: October 18th 2017

Goldman Sachs Stock Price: October 18th 2017

To gain from the uptrend, we may use our surplus capital to buy a call option contract from any of the reputed binary brokers. The trade will be taken when the stock changes and nears $236 in the NYSE. We will also opt for an option expiry date that falls between October 25 and October 30.

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