Goldman Sachs’ first-quarter results were dragged down by provisions for losses on loans to its investment bank clients, proving that the Wall Street bank is not immune to the credit woes suffered by America’s main street lenders.
Goldman, which is in the early days of a historic reshaping under chief executive David Solomon, reported net earnings of $1.2bn for the quarter ended in March, down 46 per cent year-on-year but better than analysts had expected as revenues from fixed income trading and investment banking soared.
The overall decline in profits was roughly in line with a 46 per cent fall in net income reported by Citigroup later on Wednesday morning and close to a 40 per cent fall reported by Bank of America earlier in the day.
Goldman did better than the 89 per cent fall in first-quarter profits at Wells Fargo, and a 69 per cent drop at JPMorgan Chase reported on Tuesday. “It’s just business mix,” said Marty Mosby, analyst at Vining Sparks, noting that the capital markets areas that Goldman has heavy exposure to “did so well” in the first quarter, while credit losses would be bigger at the universal banks.
Goldman set aside $937m in provisions for loan losses in the first quarter, up from $224m a year earlier. That includes $622m allocated to cover losses on loans to Goldman’s investment banking clients and $168m of provisions for its wealth management and consumer division, which includes online lender Marcus and its Apple card.
Goldman’s investment banking revenue rose 25 per cent year on year, beating its peers, while its trading powerhouse posted a 28 per cent rise in revenues in the first quarter — including the best quarter for fixed income trading in five years.
“Our quarterly profitability was inevitably affected by the economic dislocation. As public policy measures to stem the pandemic take root, I am firmly convinced that our firm will emerge well-positioned to help our clients and communities recover,” Mr Solomon assured.
Glenn Schorr, analyst at Evercore ISI, said the results were “a little bit better than expectations”, thanks to investment banking revenues and fixed income trading. He added that Goldman “will have to weather a near-term fall-off in capital markets revenues as markets normalise.”
At its January 29 investor day, Goldman detailed plans to boost profitability to levels enjoyed by its peers, including a 14 per cent return on tangible equity by 2022 and $1.3bn of cost cuts.
“All those goals kind of go out the window now,’ said Mr Mosby. “As you go into downturns and recessions, you don’t look at returns, you don’t look at revenue growth or efficiencies gains, it’s all about right now.”
Goldman’s return on tangible equity for the quarter, at 6 per cent, was higher than the 5 per cent reported by JPMorgan on Tuesday.
Goldman’s overall trading revenue rise of 28 per cent compared with a 12 per cent underlying increase in trading revenues at JPMorgan Chase, which reports its trading figures after stripping out valuation adjustments.