Goldman Sachs Hemorrhaging Profits for Fifth Straight Quarter

Goldman Sachs, America’s largest investment bank reported worse than expected fourth quarter earnings Tuesday, profits are down two-thirds from its previous quarter. $GS shares were trading down to $348.67 ▼ -25.33 (-6.77%) in the morning. 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’s results highlight a mixed quarter for US money center banks. Profit fell at most major banks and Goldman suffered the sharpest decline. Investment banking activity continued to drop off as higher interest rates and a weakening global economy curtail the multiyear dealmaking boom.

Goldman Squid

The Giant Squid Investment Banking Arm in Doldrums

Goldman Sachs Group Inc NYSE: GS Reported Before Open Tuesday

GS Q4 2022 Earnings

Despite the declines from a record 2021, Goldman’s net income for the full year was $11.3bn, its second-best performance since 2009.

Highlights

  • Net income $1.3bn, missed analysts’ expectations of $2.2bn, down from $3.9bn in the same period last year.
  • Net Revenue $10.59B (est $10.70B)
  • Loans $179B (est 178.67B)
  • Investment Banking Rev $1.87 (est $1.64B), 48% drop in the quarter.
  • FICC Sales & Trading Rev $2.69B (est $2.37B)
  • Equities Sales & Trading Rev $2.07B (est 2.14B)
  • New Consumer financial technology unit with a pre-tax loss of $778mn

Goldman’s average tangible common equity for Q4 was 4.8%, well behind its target of 15 to 17% which the bank announced in February. For the full year, its return on tangible equity was 11 %.

GS: Stock Market Reaction

  • $348.67 ▼ -25.33 (-6.77%)  Morning
  • $348.67 ▼ -18.78 (-5.14%) YTD
  • $348.67 ▼ -31.94 (-8.38%) Over year
  • $348.67 ▲ +92.89 (+36.27%) Over 5 years
  • 52wk High $389.58
  • 52wk Low $277.84

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 Tuesday that its fourth investment banking revenues fell 48 per cent in the fourth quarter from the same period in 2021 to $1.9bn. Weakness has been exacerbated by a decline in large private-equity buyouts. Morgan Stanley reported today their investment banking revenue dropped 49% from a year ago.

“Fourth-quarter 2022 M&A activity marked a weak end to a depressed year in North America as rising interest rates and a slowing economy dissuaded companies from expanding,” S&P Global Market Intelligence said in a report.

Research firm S&P Global Market Intelligence said Tuesday that only 20 IPOs made it to market in the United States during the fourth quarter last year, down from 234 in the fourth quarter of 2021.

Outlook

During the earnings conference call with analysts Tuesday, CEO Solomon said that Goldman Sachs will no longer offer new loans on its Marcus consumer platform, adding that the company has “narrowed our ambitions on our consumer strategy.”

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.

Higher rates increase margins.

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.

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. JPMorgan took a loss of almost $1 billion from selling Treasurys and mortgage-backed securities in the third quarter.

FactSet expects the negatives to outweigh the positives and expect the big banks post $28 billion in fourth-quarter profits, which is down 15% from a year earlier.

Goldman Confirmed Reorganization, Combining Investment Banking and Trading

Source: Goldman Sachs, WSJ

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