Goldman Sachs Bear Market Woes, Trading Revenue up 11%, Investment Banking Revenue Fell 57%

Goldman Sachs, America’s largest investment bank reported better than expected third quarter earnings Monday, driven by bullish results in its FICC global markets trading again (fixed-income, currencies, and commodities). However, $GS profit fell 43% in the third quarter but beat expectations with $8.25 per-share earnings over $7.75 expected. Goldman’s results concluded a mixed quarter for US money center banks. Profit fell at all six major banks and Goldman suffered the sharpest decline. JPMorgan Chase & Co., Citigroup Inc., Wells Fargo & Co., PNC, US Bancorp and Bank of America Corp. put aside a combined over $2 billion to cover possible bad loans.

While revenue fell at both Goldman and Morgan Stanley, it rose at JPMorgan, Citigroup, Bank of America and Wells Fargo, all benefiting from the rise in interest rate margins by the Federal Reserve and more aligned with the consumer.

Goldman Squid

The Giant Squid Delivered Superior Trading Results

Goldman Sachs Group Inc NYSE: GS Reported Before Open Tuesday

$8.25 Beat $7.75 EPS and $11.98 Billion Beat $11.43 Billion Forecast in Revenue

GS Q3 2022 Earnings


  • Adj EPS: $8.25 (exp $7.75)
  • Revenue: $11.98B (exp $11.43B)
  • Trading Revenue $6.20B (est $5.69B)
  • Loans $177B (est $176.07B)
  • Asset-management revenue $1.82 billion down 20%.
  • Wealth-management revenue $1.63 billion, flat from a year earlier.
  • Consumer-banking revenue rose 95% from a year earlier to $744 million.
  • Goldman ended the quarter with 49,100 employees, up 4% from the end of June and up 14% from a year ago
  • $GS +7.79 (+2.54%) Premarket, -$99.19 (-23.98%) past year

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.

Goldman more than most had been able to profit handsomely from increased trading activity. Goldman trading revenue of $6.2 billion was up 11%. Peer Morgan Stanley saw a 3% gain and JPMorgan an 8% gain. Banks that keep clients at the market and connect buyers and sellers do well in volatile markets, because informed clients are more likely to place trades.

Investment Banking Losses

Goldman said Tuesday that its third-quarter investment banking revenue fell 57% to $1.58 billion. Goldman earned $972 million in mergers and acquisitions advisory fees, down 41% from a year earlier. Stock underwriting revenue fell 79%, while bond issuance revenue fell 55%.

This in line with JPMorgan where investment-banking fees fell 47% to $1.71B, though less than analysts expected $1.59B. JPMorgan President Daniel Pinto told investors last month that he expected the bank’s investment banking fees to fall between 45% and 50% in the third quarter.

Weakness has been exacerbated by a decline in large private-equity buyouts, dropping 54% to $716.62 billion in the third quarter from the same period last year, according to Dealogic data.

U.S. banks wrote down $1 billion on leveraged and bridge loans as rising interest rates made it tougher for them to offload high-risk debt onto investors and other lenders. Wall Street banks took combined losses of $700 million on the sale of $8.55 billion in loans and bonds backing the leveraged buyout of business software company Citrix Systems Inc, Reuters reported last month, citing a person familiar with the matter.

The Twitter takeover by Elon Musk has been reported to lead to $500 million dollar losses for the financing banks if the deal goes ahead.

“We are expecting further losses on these deals,” said Richard Ramsden, an analyst at Goldman Sachs who oversees research on large banks. “It’s going to vary quite a bit,” depending on where the transactions were initially priced and how much exposure remains, he said.

Higher rates increase margins

The major upside for banks is higher short-term rates improving their net interest margins. Banks will benefit from rising rates, provided that they don’t go up too rapidly and hurt demand for mortgages, credit cards and other loans. Revenue from Goldman’s consumer-banking arm rose 95% from a year earlier to $744 million. That accounted for about 6% of Goldman’s total revenue in the quarter.

The brighter outlook for bank profits coincides with higher Treasury yields. The benchmark 10-year Treasury yield has risen dramatically for the year-to-date, with higher interest rates boosting banks income from their core lending businesses.  The bank’s net interest margin, a measure of what it collects on loans minus what it pays for deposits rises with rates.

Goldman Confirmed Reorganization, Combining Investment Banking and Trading

The day ahead of announcing third quarter earnings Goldman Sachs Group Inc. announced it plans to fold its biggest businesses into three divisions. This would one of the biggest reshuffles in the firm’s history.

  • Goldman will combine its blue-chip investment-banking and trading businesses into one unit
  • The majority of Marcus, the Wall Street firm’s consumer arm, to be part of a combined asset, wealth business. Earlier this year, GS said it aimed to bring in $10 billion in asset and wealth-management fees by 2024.
  • A third new unit called Platform Solutions will house transaction banking, the bank’s portfolio of financial-technology platforms, specialty lender GreenSky, and some pieces of Marcus, such as its ventures with Apple Inc. and General Motors Co.

Following the changes, Goldman’s organizational chart will look more like its peers.

Chief Executive David Solomon has been moving Goldman towards businesses that generate steady fees in any environment. It also reflects the firm’s constant struggle to overcome images of unbound greed and skepticism, from investors and even among some of its own executives, over its ambitions for consumer banking.

Goldman’s trading and investment-banking has been delivering massive profits when the markets favored risk-takers and bold deals, in bear markets this can be problematic. Again, this can be one of perception as Goldman traders can and do make money in bear markets. Investors as one would expect as risk avoidance heats up often discount those successes, reasoning that they are harder to sustain when market conditions turn.

This avoidance is clear when you compare peers. Goldman’s shares traded at 0.9 times book value as of June, according to FactSet. That compared with 1.4 times at Morgan Stanley and 1.3 times at JPMorgan.

Source: Goldman Sachs, WSJ

Live From The Pit

From The TradersCommunity News Desk