Goldman Sachs, America’s largest investment bank reported third quarter earnings Tuesday, though better than expected were a continuation of falling profits. 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 quarterly profit dropped less than expected as a recovery in dealmaking offset the $864 million write-down related to its GreenSky fintech business and real estate investments. GS’s net profit slumped 33% to $2.06 billion, or $5.47 per share, ahead of the profit of $5.31 per share, according to LSEG data.
The Giant Squid Investment Banking Arm in Doldrums
Goldman Sachs Group Inc NYSE: GS Reported Before Open Tuesday
GS Q3 2023 Earnings
Highlights
- EPS $5.47 (est $5.54)
- Net Rev $11.82B (est $11.13B)
- FICC Sales & Trading Rev $3.38B (est $2.86B)
- Investment Banking Rev. $1.56B (est $1.54B)
- Equities Sales & Trading Rev $2.96B (est $2.68B)
Credit Losses and Write-downs
Goldman took more losses in consumer banking after it 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. The bank took another $506 million write-down on GreenSky this quarter, which was sold to a consortium of investment firms led by Sixth Street Partners.
It was bought for $1.7 billion last year although it was valued at $2.2 billion when the deal was first announced in 2021. Goldman took a charge of $504 million on GreenSky in the second quarter.
Goldman’s ill-fated foray into consumer banking, which has lost $3 billion over three years, continued to weigh.
Real estate investments saw the bank booked an impairment charge of $358 million compared with $485 million in the second quarter. That weighed on revenue from its asset and wealth management unit, which slipped 20% to $3.23 billion. Commercial real estate loans, accounted for 14% of the total loan portfolio of Goldman.
Goldman had a headcount of 45,900 as of September end, up 3% from a quarter ago, but down nearly 7% from the year-ago period. The bank has laid off thousands of employees this year, including a round of cuts in January that was its largest since the 2008 financial crisis.
GS: Stock Market Reaction
- $314.03 ▼ -0.36 (-0.11%) today
- 314.03 ▲ +7.5 (+2.45%) past year
- 314.03 ▲ +102.02 (+48.04%) past 5 years
- 52wk High $389.58
- 52wk Low $301.87
- Mkt Cap $103.53 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
Goldman’s investment banking fees of $1.55 billion were largely unchanged from last year as debt underwriting activity resumed and the market for initial public offerings picked up. Goldman was an underwriter for high-profile initial public offerings in September, including SoftBank Group’s chip designer Arm Holdings and grocery delivery app Instacart (CART). Poor performance after debuts and the lukewarm reception to German sandal maker Birkenstock (BIRK) have raised doubts about how strong the market is.
Investment banking results have been mixed for peers, with JPMorgan Chase (JPM) reporting a 6% decline in revenue, while Citigroup (C) said fees jumped 34%. Morgan Stanley (MS) is set to report its earnings on Wednesday.
Outlook
“The work we’re doing now provides us a much stronger platform for 2024. I also expect a continued recovery in both capital markets and strategic activity if conditions remain conducive,” CEO David Solomon said in a statement.
CEO Solomon has shifted the firm’s focus back to its traditional strengths – investment banking and trading – and aims to grow in asset and wealth management.
Goldman had a headcount of 45,900 as of September end, up 3% from a quarter ago, but down nearly 7% from the year-ago period. The bank has laid off thousands of employees this year, including a round of cuts in January that was its largest since the 2008 financial crisis.
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.
Source: Goldman Sachs
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