Goldman Sachs, America’s largest investment bank reported worse than expected first quarter earnings Tuesday, hit by the ongoing dealmaking slump and a major loss recognized in the money-losing consumer bank Marcus. GS disclosed a $470 million loss “related to a partial sale of the Marcus loans portfolio”. Goldman also took a $355 million loss related to its real estate investments. Goldman reported net earnings of $3.23 billion, or $8.79 per share in the first quarter, down 18% compared to the same quarter one year ago though ahead of forecasts for $8.14 per share, according to FactSet data.
However big misses in revenue, first quarter revenue was $12.22 billion, down by 5% compared to one year ago and far short of the $12.76 billion projected by Wall Street analysts. 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. Investment banking activity continued to drop off as higher interest rates and a weakening global economy curtail the multiyear dealmaking boom.
The Giant Squid Investment Banking Arm in Doldrums
Goldman Sachs Group Inc NYSE: GS Reported Before Open Tuesday
GS Q1 2023 Earnings
Highlights
- Net earnings of $3.23 billion, or $8.79 per share in the first quarter. 18% decline compared to the same quarter one year ago, topped Wall Street’s expectation for earnings of $8.14 per share, according to FactSet data.
- Quarterly revenue was $12.22 billion – down by 5% compared to one year ago and far short of the $12.76 billion projected by Wall Street analysts.
- Fixed-income trading revenue fell 17% to $3.93 billion in the first quarter. Goldman attributed the shortfall to “significantly lower new revenues in currencies and commodities.”
- Goldman is the only major Wall Street bank to post a decline in fixed-income trading revenue so far this earnings season, according to Bloomberg.
- Global banking and market revenue fell 16% to $8.44 billion.
- Investment-banking fees fell 26% to $1.58 billion.
- Revenue in equities fell 7% to $3.02 billion.
- Asset- and wealth-management revenue rose 24% to $3.22 billion.
- Investment banking revenue sank 26% to $1.58 billion
“The events of the first quarter acted as another real-life stress test, demonstrating the resilience of Goldman Sachs and the nation’s largest financial institutions,” Goldman Sachs CEO David Solomon said in a statement.
“Our deeply rooted risk management culture, strong liquidity and robust capital position enabled us to continue to support our clients and deliver solid performance,” he added.
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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.
Marcus Bleeding
CEO Solomon said Goldman back in February was exploring “strategic alternatives” for Marcus, which has lost more than $3 billion since its debut in 2020. The bank is attempting to stabilize its business amidst an internal shift that included thousands of layoffs.
Goldman said its $470 million loss on the partial sale of Marcus loans was “largely offset” by a $440 million reserve release. The $440 million release contributed to Goldman’s earnings beat by contributing $1.20 to earnings per share, according to a Wells Fargo note obtained by CNBC.
The loan portfolio originated by Marcus is up for sale, with Goldman having already sold $1 billion with the balance held for sale – approximately $3.5 billion. The balance will continue to generate income until exited.
Goldman has pivoted from direct-to-consumer to providing back-end services as a chartered bank for neobanks like Apple and others seeking to provide financial services like bespoke credit cards. This also creates an opportunity to provide wealth management services as well.
Investment Banking Losses
Goldman said Tuesday that its first investment banking revenues sank 26% to $1.58 billion as Goldman and other firms weather on ongoing industrywide slowdown in mergers & acquisitions activity.
Rising interest rates and a slowing economy dissuaded companies from expanding,
Looking ahead, Solomon said he doesn’t expect a significant pickup in deal making until the second half of 2023. The bank sees growth opportunities in its core banking and markets franchise, which he said are “incredibly well positioned.”
Goldman Sachs retained its No. 1 position in worldwide completed mergers and acquisitions for the year to date.
Outlook
During the earnings conference call with analysts Tuesday, CEO Solomon said that Goldman Sachs intended to pull back from its consumer operations and focus its efforts on its Platform Solutions. At the same time, Goldman announced that it would sell GreenSky, an online lending platform for businesses and consumers, that Goldman acquired in 2021 in an all-stock transaction valued at approximately $2.24 billion. Goldman said they believe they were “not the best long-term holder” of the GreenSky business.
During the call, management said they are “narrowing focus in the consumer space” while focusing on scaling Platform Solutions like its partnership with Apple – including the newly launched Apple Savings feature. Goldman said they are “seeing positive momentum” in providing digital services for other firms, effectively banking as a service (BaaS).
Asked by Morgan Stanley if the “consumer repositioning” meant the consumer banking business was “done and dusted,” Goldman reiterated its “narrowing focus” comment as it seeks to bring these services to profitability. Goldman said there are other opportunities beyond the credit card and deposit services.
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.
Goldman Confirmed Reorganization, Combining Investment Banking and Trading
Source: Goldman Sachs, WSJ
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