Goldman Sachs Miss Earnings Expectations First Time in Seven Quarters as Trading Revenue Fell

Goldman Sachs, America’s largest investment bank reported worse than expected fourth earnings Tuesday. It was the first miss by $GS in seven quarters as trading revenue fell and gains on its portfolio of equity investments diminished. The trading goliath followed three of the largest U.S. lenders, JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC) reporting mixed results last week. Trading activity has been weak. Both $JPM and $C saw fixed- income trading down double digits at both banks.

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Goldman Sachs Group Inc NYSE: GS Reported Before Open Tuesday

$10.81 Missed $11.77 EPS and $12.60 Billion Beat $12.04 Billion Forecast in Revenue

Earnings

Goldman Sachs ($GS) earned $10.81 a share in the fourth quarter below the analysts forecast of EPS of $11.77 per share and down from $12.08 per share in the same quarter of the previous year. Goldman’s revenues were up 8% in the period to $12.6 billion relative to the fourth quarter of 2020. Revenue was expected at $12.04 billion, an increase of 2.58% over the prior year quarter.

GS Q4 Highlights

  • Goldman’s global markets’ revenues were down 7% year over year to $3.99 billion.
  • Within global markets, Goldman’s FICC business, fixed income, currency, and commodities recorded a 1% drop in fourth-quarter revenues while equities revenues were down 11% year over year.
  • Goldman’s investment-banking revenues were strong in the fourth quarter, rising 45% to $3.8 billion.
  • Overall revenues were up 8% in the period to $12.6 billion relative to the fourth quarter of 2020.
  • Goldman’s portfolio of equity investments generated revenues of $1.4 billion in the fourth quarter, down 20% relative to the fourth quarter of 2020, reflecting declines in some public-market holdings.
  • Goldman has a $19 billion portfolio of public and private equity investments that it has been scaling back in recent quarters as it seeks to reduce the capital-intensive investments in favor of managing more money on behalf of clients.

Goldman had a huge 2021 in which it earned a record $59.45 a share, more than double the $24.74 in 2020. It earned an outsize 23% return on equity during 2021 and a solid 15.6% in the fourth quarter.

GS is a global leader in investment banking space with solid growth momentum in investment banking continuing in the first three quarters of 2021, with cumulative revenues growing 63% y-o-y to $11.1 billion. This was due to the jump in M&A and Initial Public Offering activity. While the sales & trading segment grew 7% y-o-y to $18.1 billion over the same period, it was primarily due to higher equity trading revenues.

On Goldman’s conference call, CEO David Solomon said “Make no mistake. We are committed to executing in any market environment.” as he recognized that there “continues to be a fair amount of uncertainty” about the current operating environment given the rise in Covid cases and expectations for a series of rate increases by the Federal Reserve during 2022. Goldman’s analysts see four Fed rate hikes in 2022.

Goldman more than most had been able to profit handsomely from increased trading activity, however looking at the other banks reports it appears that aspect is on hold. Both JPMorgan and Citigroup saw 11% falls in trading revenue, with fixed- income trading down double digits at both banks. Trading revenue at Wells Fargo was flat year over year. The major upside for banks is higher short-term rates improving their net interest margins.

Asset management was the only segment in 2020, which posted negative growth. This was primarily due to lower revenues in the equity investments sub-category. However, revenues over the first three quarters have risen strongly with cumulative nine-month revenues up 152% y-o-y to $12 billion, mainly driven by higher income from equity investments.

 Big Banks Kick Off First Quarter 2022 Earnings Season

The bank rally has been fueled by expectations for the economy reopening and infrastructure spending.  The new surge in home prices has also buoyed optimism for the mortgage business and banks’ profits thereto.  

Overall, analysts and banks are looking for a strong earnings season, partly in response to the improving economy and the vaccine rollout but predominantly from the rise in interest rates with the Fed looking to raise rates. 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.

Bank Release Schedule

  • JPMorgan Chase, Citi and Wells Fargo reported earnings on Friday. The world’s largest asset manager BlackRock (BLK) also reported.
  • US Bancorp and Bank of America release their earnings on Wednesday, January 19 with investment banking powerhouse Morgan Stanley.
  • Goldman Sachs is due to report earnings on Tuesday, January 18.

Source: Goldman Sachs

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