December 5, 2023

Investment Banking

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Goldman Sachs profit tumbles on real estate hits, dealmaking slump

Second-quarter earnings fell 58%

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Goldman Sachs Group Inc.’s profit plunged as the Wall Street giant notched one of its weakest quarters under chief executive David Solomon.

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Second-quarter earnings fell 58 per cent on an investment-banking slump, real estate markdowns and a goodwill writedown in the consumer business, which houses the GreenSky lending business. Return on equity, a key measure of profitability, slid to four per cent — the worst among the top United States banks.

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The firm had been actively tamping down expectations heading into the report, prompting analysts to slash their estimates for quarterly profit by almost half since mid-June. Shares of the company fell 1.4 per cent in early New York trading.

Goldman’s management has been working to smooth the firm’s sometimes volatile quarterly results, which featured big gains during the post-pandemic boom followed by a run of missed profitability goals. Investors are looking to see whether the second quarter represents a trough for the New York-based company, with a steadier run of earnings gains ahead.

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“They’ve come out and revealed all the problems,” said Sandy Pomeroy, a money manager at Neuberger Berman Group. “They need to come out and articulate some confidence that we are at the bottom from a cyclical perspective and that they’ve cleaned up all of their problems.”

Pomeroy bought Goldman stock in January after it had tumbled from its 2021 high. She said she’s willing to be patient to give management time to clean up some of the mess. “This is clearly a battleground stock for investors,” she said. “Probably more so than any other” peer in the financial-services space.

Equity-trading revenue was one bright spot, coming in ahead of the firm’s major rivals at US$3 billion, compared with estimates for US$2.47 billion. Goldman has now clinched the top rank in that business in three of the past four quarters.

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The asset-and wealth-management business posted revenue of US$3.05 billion, down four per cent from a year earlier and below analysts’ estimates for US$3.5 billion. The unit was buffeted by the bank’s exposure to the real estate sector, with writedowns both on its lending portfolio and its equity investments contributing to a US$1.15-billion pretax earnings hit tied to principal investments.

Unlike most of its major competitors, Goldman has aggressively used its own balance sheet to make investments, a strategy that can lead to big swings in results. The firm has been looking to rely more on fees from investing money for other institutions and cut back its own wagers.

The bank also reported a jump in operating expenses due to how it accounts for impairments tied to some of its consolidated real estate investments as well as the goodwill writedown. The impairments totalled about US$1 billion.

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Goldman has been pursuing a sale of the GreenSky business just over a year after completing its purchase — one of the most visible signs of how dramatically management has backtracked on the pursuit of its retail-banking strategy in the past year. It also got rid of substantially all of its Marcus loan portfolio, recognizing a roughly US$100-million gain from that.

Another noticeable drag on earnings was the jump in taxes tied to non-U.S. earnings. That bumped up the firm’s effective tax rate to 22.3 per cent so far this year, up from just 19 per cent at the end of the March.

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Other key results:

  • Fixed-income traders brought in US$2.71 billion, down 26 per cent. Expectations were for US$2.81 billion.
  • Investment-banking revenue of US$1.43 billion fell short of analysts’ average estimate of US$1.51 billion. Equity underwriting climbed from a year earlier and advisory fees plunged. Bankers have cautioned that even when dealmaking rebounds, the low volume of announced mergers so far this year could keep the pressure on through the rest of the year.
  • Revenue dropped eight per cent to US$10.9 billion, compared to analyst estimates of US$10.5 billion.
  • Total assets under supervision increased to a record US$2.71 trillion, up from US$2.67 trillion as of March 31.

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