Goldman Sachs’ profits plunged by two-thirds last quarter, missing expectations and capping a grim year that has forced the bank to embark on its biggest cost-cutting exercise since the financial crisis.
It was the Wall Street bank’s fifth straight quarter of falling profits and Goldman has already moved to cut more than 3,000 jobs, slash bonuses and launch a sweeping review of spending.
Rival Morgan Stanley also reported a drop in net income – down 40 per cent year-on-year to $2.2 billion (€2.03 billion) for the fourth quarter, as record revenues in its wealth management businesses failed to offset a sharp fall at its investment bank.
The results on Tuesday for earnings of $1.26 a share nonetheless beat analysts’ estimates of $1.19 and highlighted the impact of chief executive James Gorman’s strategy to diversify into wealth and asset management. So far, amid difficult markets, he has only partially succeeded in providing a counterbalance to highly cyclical investment banking earnings.
But investors have cheered the approach, helping to open up a stock market valuation gap with long-time rival Goldman as the stock climbed more than 7 per cent in morning US trade on Tuesday.
The drop in fourth-quarter profit at Goldman was led by a sharp slowdown in investment banking activity as higher interest rates and a weakening global economy ended a multiyear deal making boom. Goldman said on Tuesday that fourth-quarter net income fell to $1.3 billion, short of analysts’ expectations of $2.2 billion and down from $3.9 billion in the same period last year.
Shares in Goldman fell by almost 5.8 per cent in midday trading in New York.
A 48 per cent drop in investment banking revenues in the quarter to $1.9 billion echoed declines reported last week by JPMorgan Chase, Bank of America and Citigroup. The weakness in investment banking overshadowed a better than expected performance from the bank’s traders.
The bank’s newly formed consumer financial technology unit also hit profits last quarter, with the division slumping to a pretax loss of $778 million. That was largely due to provisions Goldman made to cover potential losses on loans.
Fourth-quarter revenues from fixed income, currencies and commodities trading were $2.7 billion, ahead of analysts’ estimates of $2.4 billion, while revenues from equities were $2.1 billion, matching forecasts.
UBS analysts said that the magnitude of the earnings miss was hard to assess without Goldman providing further information around severance costs and restructuring charges stemming from its cost-cutting programme.
Despite the declines from a record 2021, Goldman’s net income for the full year was $11.3 billion, its second-best performance since 2009, according to Bloomberg data.
Goldman’s average tangible common equity for the quarter was 4.8 per cent, well behind its target of 15 to 17 per cent which the bank announced in February. For the full year, its return on tangible equity was 11 per cent.
Morgan Stanley’s results included the impact of job cuts, amounting to about 2 to 3 per cent of the company’s workforce, that the bank made late last year. Chief financial officer Sharon Yeshaya said that no further lay-offs were expected unless the economy worsened. “We’re comfortable with our position,” she said.
Investment banking had another challenging quarter, with Morgan Stanley’s revenues falling 49 per cent year-on-year to $1.25 billion, in line with analysts’ estimates of $1.2 billion.
The drop underscored the difference from 2021, when Morgan Stanley and rivals raked in revenue from advising on mergers and acquisitions and new stock market listings. Such activity has slowed dramatically in 2022.
Revenues in wealth management, which includes online trading platform ETrade, were up 6 per cent to more than $6.6 billion. But investment management, which now houses Eaton Vance following Morgan Stanley’s acquisition of the money manager in 2021, was hit by falling markets, which cut assets under management. Revenues dropped 17 per cent to $1.5 billion but topped analyst estimates of $1.3 billion. – Copyright The Financial Times Limited 2023