Goldman results: old stuff rocks; new stuff, not so much

IFR 2467 - 21 Jan 2023 - 27 Jan 2023
5 min read
Philip Scipio

Goldman Sachs was hammered by investors after badly missing analysts' expectations for fourth-quarter earnings as costs soared and revenue fell. The disappointing results came just weeks after CEO David Solomon announced the second reorganisation of his tenure, as he heads towards his five-year anniversary.

“Simply said, our quarter was disappointing and our business mix proved particularly challenging,” Solomon told analysts on the bank’s earnings call.

Quarterly profit plunged 66% from the year-earlier quarter to US$1.33bn, or US$3.32 a share, some 39% below the consensus estimate. It was the fifth successive decline in quarterly earnings, and Goldman's biggest miss in more than a decade, according to Refinitiv data. Its return on tangible equity was just 4.8% in Q4, dragging RoTE for 2022 to 11%.

“After nine straight quarters of double-digit returns, fourth-quarter performance was certainly an outlier. Results were impacted by several near-term challenges given the difficult operating environment,” Solomon said.

While investors punished Goldman and sent its shares down 6% on the day of earnings, they applauded its rival Morgan Stanley, which continued to benefit from diversifying its business mix and some big acquisitions. Its shares rose 6%.

Goldman has also made acquisitions. In late 2021 Solomon paid US$2.24bn for consumer loan platform GreenSky. It is now part of a newly reorganised “platform solutions” group at Goldman which houses its consumer-facing businesses, including retail bank Marcus.

“David Solomon should be treated like any other Goldman employee: if he performs he stays in the job, if he doesn't let’s see if there’s anybody better,” Wells Fargo analyst Mike Mayo told IFR.

Too much

Solomon will face investors at the bank’s investor day at the end of February. By then he is expected to have a strategy for turning around the consumer business, or at least plans to shrink it so it's not a distraction.

“Pulling back the lens, the main positive is that 70% of the company is best-in-class capital markets banking and trading,” Mayo said. “Under Solomon, Goldman has increased market share meaningfully in this legacy business that has been its strength for 150 years. So he has been an exceptional steward of the capital markets business.”

"That said ... it’s the other stuff where he doesn’t look as strong," Mayo said.

While Solomon inherited Goldman’s consumer businesses, he made the decision to lean into it. GreenSky, Mayo said, seemed like an ill-timed acquisition.

Goldman reported net revenues of US$1.5bn for the platform solutions group in 2022, up 135% from 2021. But the bank socked away a whopping US$2.72bn in credit loss provisions last year, including US$972m in the fourth quarter alone, compared with US$357m for all of 2021. The number shocked analysts and hit profits hard. The provision primarily reflected growth in the credit card portfolio, the impact of macroeconomic and geopolitical concerns and net charge-offs, Goldman said.

When asked what went wrong with the consumer strategy, Solomon told analysts: “we tried to do too much too quickly.”

Solomon said he had narrowed ambitions in the bank’s consumer strategy and made some “key decisions”. Those include ending new loans on the Marcus platform, and postponing the launch of its cheque product.

“For now, our priority is to strengthen our deposit franchise,” Solomon said.

Operating expenses rose 11% in the fourth quarter, with compensation and benefits expenses soaring 16%.

“We always strive to maintain a pay-for-performance culture,” Solomon said. With revenues down, compensation was lower, he said. But in a talent-driven business, he said the bank “must continue to invest in our people whose dedication is critical to our world-class franchise".

In its effort to right the ship ahead of its investor day, Goldman cut its workforce by 3,200 in early January, or 6%. But Goldman had added more than 10,000 employees since the end of 2019, representing a 27% increase in headcount, partly due to acquisitions, but also a hiring binge.

Goldman said it was also taking “a number of strategic actions” intended to help the bank reach financial targets and create shareholder value. That includes the second reorganisation under Solomon streamlining its business lines.

Goldman has increased share in global markets and grown revenue twice as fast as peers, Mayo said. "If there’s a bank you want to call for investment banking needs it’s still Goldman Sachs," he said. The question for investors is: is the glass 70% full or 30% empty? “Unfortunately they got penalised for the 30%,” Mayo said.

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