Goldman Profit Plunge Expected Amid Consumer Lending Losses

Slumps in deals, stock offerings also pressured the banking giant

Goldman Sachs logo on an office wall

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Key Takeaways

  • Goldman Sachs is expected to post fourth-quarter adjusted earnings of $5.78 per share before Tuesday's market open, down nearly 50% from a year earlier.
  • The Wall Street giant is struggling with downturns in mergers and equity underwriting, as well as big losses from a recently curtailed push into consumer lending.
  • Goldman laid off 3,200 employees, accounting for 7% of its workforce, this week.
  • CEO David Solomon is seeking to increase fees revenue from wealth and asset management after consumer lending burdened the firm with heavy losses.

Goldman Sachs (GS) heads into its fourth-quarter report before the markets open Tuesday with a newfound enthusiasm for asset management, as the Wall Street giant backs away from a consumer-focused growth strategy that's saddled it with losses in the billions.

The financial firm best known for investment banking and proprietary trading is expected to report adjusted earnings of $5.78 per share, barely half of its EPS in the year-ago quarter, based on analyst estimates from Visible Alpha. That would be the lowest per-share result since the second quarter of 2020, amid mounting allowances for credit losses and a slump in mergers and acquisitions (M&A), which is expected to slash Goldman's investment banking revenue in half year-over-year. Wall Street expects Goldman's overall revenue to drop 15% year-over-year for the fourth quarter to the lowest quarterly total in more than two years.

The quarterly report follows this week's layoff of some 3,200 Goldman employees, accounting for 7% of the firm's workforce. It also comes after Goldman in October embarked on its third major reorganization in CEO David Solomon's four-year tenure, placing its wealth- and asset-management businesses in the same segment once more to underscore the company's interest in growing its fee-based income.

The more immediate effect of the latest strategy shift has been to highlight Goldman's losses from its recently curtailed push into consumer lending and banking. These amounted to $1.2 billion in the first nine months of 2022 and $3 billion since the start of 2020, the company revealed late on Thursday when it released pro forma retroactive results for its reshuffled business units.

The losses are likely to grow deeper still at the new Platform Solutions division, consisting of Goldman's credit card loans, banking transactions payments processing, and GreenSky, the specialty lender Goldman acquired near the peak of fintech company valuations in September 2021 for $2.2 billion. Goldman is likely to report a fourth-quarter Platform Solutions loss in excess of $2 billion Tuesday, Bloomberg reported this week.

"There are a variety of factors impacting the business landscape, including tightening monetary conditions that are slowing down economic activity. We need to proceed with caution and manage our resources wisely,” Solomon wrote in a staff memo late last month warning of layoffs.

The lean times in investment banking and (for Goldman) in consumer lending raise the stakes for the results in asset management, wealth management, and proprietary trading. Trading in stocks, fixed income, currencies, and commodities accounted for just over half of Goldman's revenue and 80% of its net income in the third quarter. Rival JP Morgan Chase (JPM) reported a 7% year-over-year increase in its fourth-quarter trading revenue on Friday. JP Morgan also reported a $2.3 billion provision for credit losses. It cited "a modest deterioration in the firm’s macroeconomic outlook, now reflecting a mild recession in the central case."

Goldman's share price has mostly shrugged off the bad news, outperforming the S&P 500 index with a total return of -2.7% in a year, versus -15.7% for the S&P 500. The stock was up nearly 8% in 2023 and 31% since July 14, not counting its gain of nearly 1% in Friday's midday trading.

1-Year Total Return for S&P 500 and Goldman Sachs

 One-Year Total Return for S&P 500 and Goldman Sachs
Source: TradingView.

Goldman Sachs Key Stats

  Estimate for Q4 FY 2022 Q4 FY 2021 Q4 FY 2020
Adjusted Earnings Per Share ($) 5.78 10.81 12.08
Revenue ($B) 10.7 12.6 11.7
Investment Banking Revenue ($B) 1.7 3.6 2.7

Source: Visible Alpha

The Key Metric

Investment banking revenue consists of the fees Goldman receives for advising clients on M&A, among other transactions, and for underwriting corporate debt and equity offerings.

Goldman's advisory and equity underwriting receipts plummeted in 2022 as a result of the bear market in stocks and the downturn in merger activity in the second half of the year. The firm's third-quarter investment banking revenue was down 57% year-over-year and off 26% from the second quarter of 2022.

Article Sources
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  1. NPR. "Goldman Sachs Announces the Largest Round of Layoffs Since 2008's Financial Crisis."

  2. The Wall Street Journal. "Goldman Shuffle Aims to Reduce Reliance on M&A." (Subscription required.)

  3. Bloomberg. "Goldman Shakes Up Leadership Ranks in Yet Another Overhaul." (Subscription required.)

  4. Reuters. "Goldman Sachs Platform Solutions Business Lost $1.2 Billion in Nine Months."

  5. The Wall Street Journal. "Goldman Sachs Lost $3 Billion on Consumer Lending Push." (Subscription required.)

  6. U.S. Securities and Exchange Commission. "Goldman Sachs Form 8-K, Jan. 12, 2023."

  7. Bloomberg. "Goldman to Cut About 3,200 Jobs This Week After Cost Review." (Subscription required.)

  8. New York Post. "Goldman Sachs CEO David Solomon Warns Mass Layoffs Just Weeks Away."

  9. Goldman Sachs. "Third Quarter 2022 Earnings Results Presentation," pp. 1, 8, 10.

  10. J.P. Morgan Chase. "4Q22 Earnings Press Release," Page 4.

  11. J.P. Morgan Chase. "4Q22 Earnings Press Release," Page 2.

  12. Goldman Sachs. "Third Quarter 2022 Earnings Results Presentation," Page 8.

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