Goldman Sachs, America’s largest investment bank reported worse than expected second quarter earnings Wednesday. This has been a horror stretch for the ‘Giant Squid’ with $GS cutting jobs and bonuses at a rate not seen since the financial crisis. Goldman was the only one among its big-bank peers to miss per-share earnings expectations. Citigroup and Morgan Stanley did report profit declines, however Goldman’s decline dwarfed theirs. Investment banking activity continued to drop off as higher interest rates and a weakening global economy curtail the multiyear dealmaking boom.
Goldman’s quarterly profit was $1.22 billion, down 58% from a year ago. EPS was $3.08 per share, which missed the $3.16 per share expected by analysts polled by FactSet. Once the great savior, Goldman’s trading revenue fell 14%. The report is littered with write-downs and impairments.
The Giant Squid Investment Banking Arm in Doldrums
Goldman Sachs Group Inc NYSE: GS Reported Before Open Wednesday
GS Q3 2023 Earnings
- Net earnings of $1.22 billion, down 58% from a year ago or $3.08 per share, which missed the $3.16 per share expected by analysts polled by FactSet.
- Revenue was $10.9 billion, down 8% from a year ago, beat the $10.61 billion expected by analysts.
- Investment-banking revenue fell 20%. Investment banking was roughly flat at Morgan Stanley, and down at JPMorgan and Citigroup.
- Q2 net interest income of $1.68B dropped from $1.78B in Q1 2023 and $1.73B in Q2 2022.
- Asset and wealth-management revenue of $3.05B fell 5% Q/Q and 4% Y/Y; fees $2.35 billion, a record and up 5% from a year prior.
- Goldman’s trading revenue fell 14%. FICC revenue of $2.71B dropped 26% Y/Y; Equities revenue of $2.97B was roughly unchanged Y/Y. Trading revenue was also down at Morgan Stanley, JPMorgan and Citigroup.
- Platform Solutions net revenue of $659M increased 17% Q/Q and 92% Y/Y, as consumer platforms reflected significantly higher average credit card balances and higher average point-of-sale loan balances.
Credit Losses and Write-downs
Goldman took $1.4 billion in write-downs in the second quarter tied to its GreenSky fintech business, which facilitates home improvement loans to consumers and real estate investments. It also took more credit losses related to its consumer loans and business.
- Provision for credit losses were $615M vs. a net benefit of $171M in Q1 2023 and provision of $667M in Q2 2022.
- Loans of $178B at June 30, 2023 were unchanged from March 31; deposits of $399B increased $376B at March 31.
- Total operating expenses were $8.54B, up 2% Q/Q and 12% Y/Y.
- Compensation and benefits expense fell to $3.62B, vs. $4.09B in Q1 and $3.70B in Q2 2022.
- Headcount of 44,600 slipped from 45,400 in the prior quarter and from 47,000 at June 30, 2022.
- Wrote down $504 million of “goodwill” related to its consumer-platforms unit that houses, among other things, the specialty lender GreenSky.
- Took impairments of about $485 million related to real-estate investments within its asset-management business. The impairments reflected properties the bank sold as well as properties the bank has marked down but not yet sold.
- Goldman’s return on equity fell to 4%, from 11.6% last quarter and 10.6% a year prior.
- GS said return on equity would have been 9.2% for the quarter without the write-downs.
GS: Stock Market Reaction
- $342.51 +5.24(1.55%) today
- $342.51+24.46 (7.69%) past year
- $342.51 111.27 (48.12%) past 5 years
- 52wk High $381.38
- 52wk Low $281.70
- Mkt Cap $114 B
Goldman tends to benefit from rising asset prices through its various investment vehicles, and so broad declines in financial assets stung the firm in the quarter.
Investment Banking Losses
Goldman said Wednesday that its first investment banking revenues sank 20% $1.43B. Primarily lower advisory net revenue, reflecting a significant decline in M&A, partly offset by higher revenue in Equity underwriting. This follows the 26% fall to $1.58 billion last quarter as Goldman and other firms’ weather on ongoing industrywide slowdown in mergers & acquisitions activity.
Investment banking was roughly flat at Morgan Stanley, and down at JPMorgan and Citigroup.
Rising interest rates and a slowing economy dissuaded companies from expanding, without lower rates it is hard to see any significant pickup in deal making until at least the second half of 2023.
Goldman Sachs retained its No. 1 position in worldwide completed mergers and acquisitions for the year to date.
During the earnings conference call with analysts Wednesday, CEO Solomon said cited signs of a recovery in investment banking. “It definitely feels better over the course of the last six, eight weeks,” Solomon told analysts on a conference call. “This is obviously a tough quarter,” but he added “the environment feels better.” He cited activity picking up in equity capital markets and a revival of client discussions on mergers and acquisitions.
“This moment in the economic cycle creates meaningful headwinds for Goldman Sachs,” Solomon said told analysts on a conference call. “We are making tough decisions that are driving the strategic evolution of the firm. Given both these factors, it should come as no surprise that we’re going to a period of lower results.”
Higher rates increase margins but there is a cost.
The Federal Reserve’s rate-boosting campaign, producing more revenue as rates rise, allowing banks to generate more profit from their core activities of taking in deposits and making loans. With higher interest rates from the Federal Reserve’s aggressive rate hiking revenues are expected to rise from a year earlier. Net interest income (NII) widened as the net interest margin widened, simply the gap has widened the gap between what the big commercial banks pay depositors and what they earn lending money out.
Tighter bank lending will be compounded by a pullback in “private Credit” and other non-bank lenders. This is particularly problematic for earnings and loan quality for small and mid-sized banks that have operated so aggressively in real estate finance over recent years. Office buildings are an obvious trouble spot, but commercial real estate in general is vulnerable. Cracks are appearing in the booming nationwide apartment marketplace, and there are indications of waning institutional interest in residential housing.
However, there is a price for this, the clearest is the housing market which with the collapse in affordability through higher rates and inflation has dropped off dramatically ion activity. For banks this means the fee income from home lending has fallen right off.
Rising rates have also had another big impact for Banks, and Central banks alike, the higher rates have seen huge losses on the bond paper they hold. When interest rates go up, bond prices go down, meaning there are significant unrealized losses at current prices. JPM in Q1 2023 took an $868 million loss on the sale of investment securities whose values have plunged with rising rates.
Source: Goldman Sachs, WSJ
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