- Goldman Sachs' trading and investment banking businesses—accounting for more than half its revenue—both struggled in the first quarter.
- Rising interest rates probably boosted Goldman's net interest income, but total non-interest revenue likely slid.
- Money set aside by Goldman for potential credit losses likely rose by 43%.
A slight revenue loss, driven by declines in investment banking and trading, and rising expenses likely will cut Goldman Sachs' (GS) profit by more than a fifth when the financial behemoth releases its first-quarter earnings Tuesday.
Analysts expect the firm will report net income of $3.1 billion, or $8.34 per share, according to consensus estimates from Visible Alpha. That would represent a 22% decrease from $3.9 billion, or $10.76 per share, in the same period a year ago.
Goldman's revenue is forecast to decline by 1% to $12.8 billion. Rising interest rates likely will allow the company's net interest income to increase by 18.6% to $2.2 billion, but falling revenue elsewhere and increased costs will reduce profitability.
|GOLDMAN SACHS KEY STATS|
|Q1 2023 (est)||Q1 2022||Q1 2021|
|Investment banking revenue||$1.5B||$2.1B||$3.6B|
|Net interest income||$2.2B||$1.8B||$1.5B|
|Credit loss provisions||$801M||$561M||($70M)|
Source: Visible Alpha
Higher Costs and Credit Loss Provisions
At least a portion of those costs reflects the U.S. banking system turmoil, fed by rising rates, that punished stocks throughout the financial sector in the first quarter. Goldman's shares fell 4% during the quarter, faring somewhat better than the 6% loss for the S&P 500 Financials sector in the same period.
As it did throughout 2022, the firm probably again will increase the amount of money it sets aside for potential credit losses, this time to an estimated $801 million, up from 43% from $561 million in last year's first quarter.
Meanwhile, inflation-driven increases in costs across the board likely will boost the company's operating expenses by 6.4%.
Trading, Investment Banking Revenue Slide
Still, declining revenue in two key parts of the company's business—trading and investment banking —is causing the biggest hit to first-quarter earnings.
In late 2022, Goldman announced a significant reorganization that will combine those two units, which generally account for more than half the company's revenue. In the first quarter, they both struggled.
The firm plays a key role in U.S. financial markets as one of Wall Street's largest market makers. Revenue from that enterprise likely fell by 24% in the first quarter to $4.6 billion.
Meanwhile, the marked slowdown in mergers and acquisition activity that accompanied the Federal Reserve's push to raise interest rates last year remained a revenue drag.
After surging in 2021, investment banking revenue at Goldman likely will plummet for the fourth time in five quarters by more than 30% to $1.5 billion, down 31% from $2.1 billion a year ago.
Those businesses' revenue decline probably will overshadow substantially increased revenue coming from investment management services and wealth advisory/brokerage commissions and fees.
Total non-interest revenue—money made aside from earning interest on loans and paying rates on deposits—likely dropped 2.7%. And those sales are forecast to account for 84% of the quarter's total revenue.
Visible Alpha. "Financial Data."
The Wall Street Journal. "Goldman Plans Sweeping Reorganization, Combining Investment Banking and Trading."
S&P Global. "M&A Activity Slumped in North America in 2022 After Record 2021."