All That Glitters Is Not Goldman

In terms of quarterly results, the financial sector has been largely feast-or-famine these past few days. Companies are posting either blah numbers or, in the case of investment-banking lord Goldman Sachs (NYS: GS) , smashing estimates in a meaningful way. The company's revenue leaped 64% quarter-on-quarter, while net profit more than doubled, and margins crossed the 20% barrier. Some of the bank's operations are doing spectacularly. However, there are weak spots.

Succeeding where it counts
On the whole, Goldman's quarter-on-quarter improvements were very positive. The areas seeing the highest increases were those where the company traditionally excels. Not accidentally, these are also some of the higher-margin activities investment banks engage in.

The category receiving the prize for Best Improvement Over the Previous Quarter was investing and lending -- essentially the company's direct trading activities. Given the nature of these undertakings, they can rise or sink quite a bit quarter to quarter. This particular quarter they jumped, increasing nearly 120% over those of Q4 to $1.9 billion. Sales of debt instruments saw a pronounced improvement over that time, to $585 million in the black from the previous quarter's loss of $221 million.

Goldman's cash registers rang louder as its institutional clients did more business with the bank. Fixed income, currency, commodities, and equities trades facilitated for these well-heeled customers all saw mighty increases, collectively more than doubling (to around $3.5 billion) from this past quarter to the previous one.

Feast, meet famine
That's the good news. Not all critical metrics are quite so glowing for Goldman, however. No financial institution can escape the hardship of low interest rates; why should this company be an exception? Net interest income continued to drop -- it's now at the sub-$1 billion level, after hanging tough just over that mark in Q4. In the first quarter of last year, that figure was substantially higher, at $1.36 billion.

Securities underwriting is usually the bread and butter of any investment bank in times when it's common for new firms to come to market. Goldman posted results that were good on the surface -- $665 million was the take from this activity, a nice 72% improvement over Q4.

But in the grander scheme of things, it still has to catch up: it's fallen to third place this year in terms of equity underwriting after being top dog in 2011. Low interest rates haven't been a lure for the bank's corporate-bond underwriting, as Goldman is now No. 7 in that activity.

Compensation also seems to be drifting upward, despite recent attempts to rein it in, including layoffs. The company paid around $4.4 billion to a dwindled workforce of approximately 32,400. That expense amounted to 44% of revenues, which matches the level of the same period one year ago. Expenses aren't going down ... but the company's top line certainly is. It was 16% higher (at $11.9 billion) in that year-ago time frame.

Goldman could slice more if it really wanted to. In 2009, in the wake of the financial crisis, the company reduced comp costs to 36% of revenue. This was its lowest level ever, not bad for a company that just two years previously had set a record for employee pay.

Yes, investment-banking talent is expensive. Layoffs, however, are aimed at reducing costs, not maintaining them at the same level. One year ago, Goldman had about 3,000 more employees than at present. Most likely, at least a few of them were rainmakers. Cutting these folks loose hasn't really produced any savings, proportionally speaking, so the layoffs seem like a big effort wasted.

Runners-up don't win the gold
Goldman's certainly taken its knocks since the bad old days (circa 2008) of bank bailouts, Occupy protests, and the stray New York Times editorial from disgruntled former employees. The company is unabashedly, nakedly, 1,000% about making money, and a lot of it. One great advantage it has, besides its storied name and history, is that those high-margin business segments where only the big boys like Morgan Stanley (NYS: MS) compete and where Goldman has historically done well.

It has the skills to do this, and if it's going to continue to improve over the next few quarters it needs to realize that potential in certain key areas. IPOs, for example, have been hitting the market hard and fast over the past year or so; a company with Goldman's name and experience really should be capturing more of this business instead of settling for No. 3.

Discounts? What discounts?
It's particularly critical to make money in these areas, because the onetime foundation of the business -- securities trading -- isn't much of a business at all today. Market volumes have been flat for quite some time now, and there are now a host of trading-centric financial companies offering low commissions for their clients.

Unlike Goldman, these companies don't operate in the higher-margin areas. The good thing about this is that their business is more consistent. The flip side is, the lousy periods can be consistently disappointing. Both Charles Schwab (NYS: SCHW) and TD AMERITRADE, for example, just posted quarterly results that were uninspiring at best.

For Chuck, although revenue and net profit more or less matched analyst expectations, both line items nonetheless declined over the previous quarter. TD AMERITRADE, meanwhile, posted a net that was 20% down year on year, and it currently seems to be experiencing its third straight monthly decline in trading volumes.

If Goldman's results are anything to go by, for those who want to hold positions in the financial sector it might be better to maintain one in a classic white-shoe investment firm. There's some good business out there for them; it's just a matter of capturing it. We'll see whether Morgan Stanley manages to beat Goldman in this respect when that bank releases its results early on Thursday.

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At the time thisarticle was published Fool contributorEric Volkmanowns shares of TD AMERITRADE.Motley Fool newsletter serviceshave recommended buying shares of Goldman Sachs and Charles Schwab. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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