November 30, 2023

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Wall Street divided over just how bad Goldman Sachs’ earnings will be

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Bank analysts are sharply divided over just how bad Goldman Sachs’ second-quarter earnings will be, offering a much wider range of estimates than is typical for the Wall Street company.

There is a consensus that it will not be one of Goldman’s best quarters, but some are predicting it could be one of the bank’s worst. Earnings estimates range from Goldman making 33 cents per share and barely eking out a profit, to almost $5 a share and netting more than $1.5bn. 

While it is not uncommon for analysts to disagree, the debate over what Goldman, led by chief executive David Solomon, will report on Wednesday is more divided than usual.

A fundamental reason for the uncertainty is because some analysts expect Goldman’s leadership to take a “kitchen sink” approach by stuffing in as many one-off items as it can in what was already shaping up to be a challenging quarter. 

“Goldman Sachs cannot afford to be a serial offender, to go back next quarter and tell investors about more charges they need to take. That’s CEO school 101,” said Mike Mayo, a longtime banking analyst at Wells Fargo. 

Like its peers, Goldman’s earnings are suffering from a sharp drop in investment banking fees and a slowdown in stock and bond trading. But the bank’s profits will also take a hit from likely writedowns on a recent acquisition and losses from its consumer and commercial real estate loan portfolios. 

Analysts are guessing Goldman’s net income might be as high as $1.7bn for the quarter or as low as $116mn, according to data compiled by Bloomberg, a far steeper drop than peers. 

On an earnings-per-share basis, these estimates for Goldman range from as low as 33 cents to as high as $4.99, far wider than they have for other banks this quarter and the broadest range analysts have had for Goldman’s results in more than two years. On Wall Street, 10 cents a share can count as a big earnings beat. 

Column chart of $ per share showing Analysts split on what Goldman's profits will be in the second quarter

The unpredictability comes despite Goldman’s management team going to greater lengths than normal to flag for investors that this quarter would be a challenging one for the bank. 

Solomon told CNBC in June that Goldman would take “impairments” on loans it had made in commercial real estate, while president John Waldron warned that equities and fixed-income trading was on track to be down 25 per cent year on year. 

Analysts are also anticipating that Goldman could take a writedown of several hundred million dollars on the home improvement lending business GreenSky, which it acquired last year for $2.2bn but is already in the process of selling. 

It will be another quarter in which Goldman has lagged behind peers such as Morgan Stanley and JPMorgan Chase, which have other businesses including wealth management and retail banking to pick up slack when trading and investment banking sputter.

This will add to the challenges facing Solomon, Goldman’s chief executive since 2018, who is already dealing with unrest among many employees and pressure to deliver on his strategy to diversify the bank’s business. 

Despite Solomon’s efforts to expand into newer areas, Goldman is still heavily reliant on its legacy businesses of investment banking and trading, which do not garner a higher stock market valuation from investors due to their volatility. 

Goldman is in the process of paring back its ambitions in consumer banking after years of losses and is emphasising growth plans in asset and wealth management. But analysts view those businesses as being far away from rivalling investment banking and trading for size at Goldman. 

Goldman’s return on equity, a critical measure of profitability, is forecast to be about 5 per cent for the quarter, below the 10 per cent hurdle seen as earning back the cost of capital, and well off the bank’s own target of 14-16 per cent.

After record profitability during the coronavirus pandemic from volatile financial markets and nonstop investment banking activity, some analysts fear that the bank could face a prolonged period of underwhelming returns as it did when it emerged from the 2008 financial crisis. 

“The issue for Goldman here is: are these temporary issues that once they’re resolved they can get to their target RoE of mid-teens?” said Christian Bolu, an analyst at Autonomous Research.

“Or are we back to the bad old days post-financial crisis where returns were very weak.”