Goldman Sachs Traders Ride the Stock Market Rally, Equity Trading Revenue Jumped 26% in Q4

Goldman Sachs, America’s largest investment bank reported better than expected fourth quarter earnings Tuesday with profit up 51 per cent. The bank reported a profit of $2.01 billion, or $5.48 per share, for the latest quarter, compared with $1.33 billion, or $3.32 per share, a year earlier. Goldman’s equity traders were on the right side of the recovery in markets. Goldman’s equity trading revenue jumped 26 per cent in the fourth quarter. Revenue from the asset and wealth management business also jumped 23 per cent to $US4.39 billion, helped by gains from equity and debt investments. These gains offset weakness in investment banking.

The bank’s shares climbed +$6.31 or +1.7% to $384.58 in early trading. $GS rose 12.3% last year, compared with gains of 27% for JPMorgan Chase and 10% for Morgan Stanley.

Goldman Squid

The Giant Squid Investment Banking Arm Still in Doldrums

The rebound comes after what had been a continuation of falling profits. Last year had been a horror stretch for the ‘Giant Squid’ with $GS cutting jobs and bonuses at a rate not seen since the financial crisis. The bank wrote down its GreenSky fintech business and real estate investments. The rally in the stock and bond market came at a perfect time for the bank. Its $46.5 billion in sales was its worst year since 2020 and its $8.52 billion in net income its least profitable year since 2019.

On Friday we saw a slew of major banks report. JPM reported along with three of the largest U.S. lenders. There were mixed results at the close; Wells Fargo (WFC 47.40, -1.64, -3.3%), Bank of America (BAC 32.80, -0.35, -1.1%), JPMorgan Chase (JPM 169.05, -1.25, -0.7%) were lower while and Citigroup (C 52.62, +0.54, +1.0%) was higher. BlackRock (BLK) also reported. Notably all other than Bank of America exceeded consensus earnings estimate for the December quarter and didn’t sound any real macro alarm bells.

GS Q4 2023 Earnings

Highlights

  • Profit of $US2.01 billion, or $US5.48 per share, compared with $US1.33 billion, or $US3.32 per share, a year earlier.
  • Net Revenue $11.32B (est $10.84B)
  • Equity trading revenue +26% $2.61B (Est $2.25B)
  • Asset and wealth management +23% to $US4.39 billion, helped by gains from equity and debt investments.
  • Fixed income, currencies and commodities (FICC) trading revenue fell 24% $2.03B (est $2.58B) due to weakness in interest rate products and currencies, that dragged down gains from mortgage products.
  • Banking & Markets Rev $6.35B (est $6.47B)
  • Goldman’s platform solutions unit revenue, which houses some of its consumer operations rose 12% to $US577 million.
  • Investment banking fees fell 12% compared to last year, to $US1.65 billion, a decline in mergers and acquisitions (M&A) offset gains from debt and stock sales.
  • AUM rose 10% during the year, to a record $2.81T (est $2.77T)
  • NII $1.34B (est $1.73B)
  • Loans $183B (est $180.86B)
  • GS recognized a $US529 million expense tied to the FIDC fee in the fourth quarter.

GS: Stock Market Reaction

  • $384.19 +6.44(1.70%) today
  • $384.19 +34.27(9.79%) past year
  • $384.19 +187.11(94.94%) past 5 years
  • 52wk High $389.47
  • 52wk Low $287.00
  • Mkt Cap $125 Bil

“This was a year of execution for Goldman Sachs,” “With everything we achieved in 2023 coupled with our clear and simplified strategy, we have a much stronger platform for 2024.”

CEO David Solomon said in a statement.

Layoffs in 2023

Goldman had a headcount of 45,300 at the end of December, 1% less than in the third quarter and nearly 7% lower than in the year-earlier period. Cuts to its workforce in January were the largest since the 2008 financial crisis.

FIDC Fee

Goldman is among the banking giants that will pay a special assessment fee to refill a government deposit insurance fund (DIF) that was drained of $US16 billion by the collapse of two regional banks last year. GS recognized a $US529 million expense tied to the fee in the fourth quarter.

Credit Losses and GreenSky Write-downs

Goldman posted impairments tied to its commercial real estate exposure of $262 million in Q4. Fixed-income traders brought in $2.03 billion, a drop driven by lower revenue from rates and currencies. While Goldman has benefited from volatile markets in recent years, its executives have said market-share gains and an increased focus on the financing business should reset the base at a high level in the trading unit.

GS released $160 million of reserves by transferring its General Motors credit card portfolio to a category of assets known as held for sale. General Motors is looking for a new partner to replace Goldman Sachs. Four years after introducing a credit card with Apple, the bank also faces a costly exit from a partnership that is seen by other lenders as too risky and unprofitable.

  • In the third quarter 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 in Q3, 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 in Q3.
  • Real estate investments saw the bank booked an impairment charge of $358 million in Q3 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 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 highly profitable investment banking division, with its $6.2 billion in 2023 investment banking revenues and $3.3 billion in mergers and acquisitions strategic advisory revenues Goldman’s worst respective numbers since 2013 and 2020.

Goldman’s Investment banking fees fell 12% compared to last year in Q4 to $US1.65 billion, a decline in mergers and acquisitions (M&A) offset gains from debt and stock sales. They were up from Q3’s investment banking fees of $1.55 billion though 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.

Outlook

Goldman’s return on common equity was 7.5% last year. Typically, Goldman and other banks aim to have that figure above 10%.

“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 of investment banking and trading and aims to grow in asset and wealth management.

Goldman Sachs Last Quarter Earnings

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.

Goldman’s Competitors Q4 Earnings:

Source: Goldman Sachs

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