Financial Giant’s Struggle: Goldman Sachs Posts Three-Year Low Profit on Consumer Setbacks

by / ⠀Featured News / July 19, 2023
Financial Giant's Struggle: Goldman Sachs Posts Three-Year Low Profit on Consumer Setbacks

Goldman Sachs, one of Wall Street’s leading financial institutions, has reported a significant decline in profits for the second quarter of the year. The bank’s earnings dropped by a staggering 60%, falling short of Wall Street’s expectations. This decline can be attributed to the company’s retreat from consumer businesses and a decline in investment values, resulting in a $1.4 billion reduction in earnings.

Challenging Quarter for Goldman SachsGoldman Sachs experienced its worst quarter since 2020, when it faced significant writedowns due to a corruption scandal linked to the Malaysian state fund 1MDB. The bank took a writedown of $504 million associated with its GreenSky business, which facilitates home improvement loans to consumers, and another $485 million related to its real estate investments. These setbacks, along with $615 million in credit losses, contributed to the decline in profitability.

The disappointing financial results caused Goldman Sachs’ shares to dip by 0.7% in early trading. The bank’s CEO, David Solomon, acknowledged the challenges faced during the quarter but emphasized the continued strategic execution of their goals. Solomon highlighted the solid returns delivered by the Global Banking & Markets division, particularly in the M&A sector, where Goldman Sachs maintained its top ranking in league tables for completed deals.

Financial Performance and Analyst ExpectationsFor the three months ending June 30, Goldman Sachs reported a 60% decrease in earnings, with $3.08 per share compared to $7.73 per share the previous year. Analysts had anticipated a profit of $3.18 per share, according to Refinitiv data. Net earnings also saw a significant decline, dropping by 62% to $1.07 billion compared to $2.79 billion a year earlier.

Randy Frederick, the managing director of trading and derivatives at Charles Schwab, commented on Goldman Sachs’ performance, stating that the bank clearly missed the target, making it an outlier among other major banks. This sentiment was echoed by the bank’s competitors, such as JPMorgan Chase and Morgan Stanley, who reported better-than-expected earnings.

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Consumer Business and Real Estate InvestmentsGoldman Sachs’ struggles in the consumer business sector were evident during the second quarter. The bank took a significant hit with a writedown of $504 million related to its GreenSky business, which offers consumer loans for home improvements. Furthermore, the bank faced challenges in its real estate investments, resulting in a $485 million writedown.

To mitigate losses and streamline operations, Goldman Sachs made significant changes to its business structure. The Marcus unit, which previously focused on retail banking, was merged into the bank’s asset and wealth management arm. Additionally, the bank sold a substantial portion of its Marcus loans portfolio, resulting in a gain of $100 million.

Asset and Wealth Management Unit PerformanceGoldman Sachs’ asset and wealth management unit experienced a 4% decrease in revenue compared to the previous year. This decline was primarily attributed to losses from real estate investments. However, the unit recorded record fees and assets under supervision. In an effort to optimize its asset management’s alternative arm, the bank announced plans to sell approximately half of its commercial real estate-related investments within the next three to five years.

Investment Banking and Trading RevenueGoldman Sachs’ investment banking fees for the quarter decreased by 20% to $1.43 billion. The decline in trading revenue was even more pronounced, with fixed income, currency, and commodities trading falling by 26%, while equities trading saw a modest 1% increase. These results were influenced by the Federal Reserve’s aggressive interest-rate increases, which aimed to control inflation but also affected market activity.

The uncertain economic outlook has also impacted mergers and acquisitions, with a 36% decrease in global activity during the second quarter compared to the previous year. However, the bank remains optimistic that a recovery in stock markets will stimulate dealmaking in the coming months, potentially bolstering the investment banking sector.

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Workforce Reductions and Future OutlookIn an effort to manage costs and mitigate the impact of a dealmaking slump, Goldman Sachs has already laid off thousands of employees. Further layoffs may be expected if revenue does not rebound. The bank’s headcount fell by 2% from the previous quarter to 44,600.

Looking ahead, Goldman Sachs anticipates a potential slowdown in the second half of the year due to high borrowing costs resulting from the Federal Reserve’s interest-rate increases. However, the bank remains cautiously optimistic, as a flurry of initial public offerings (IPOs) and the ongoing recovery in stock markets could provide opportunities for growth.

FAQ

Q: Why did Goldman Sachs’ profits decline in the second quarter?

A: Goldman Sachs experienced a decline in profits due to its retreat from consumer businesses and a decline in investment values.

Q: How did the bank’s shares perform after the announcement of the financial results?

A: Goldman Sachs’ shares dipped by 0.7% in early trading following the announcement of the disappointing financial results.

Q: What were the main factors contributing to the decline in profitability?

A: The decline in profitability was primarily attributed to writedowns related to the GreenSky business and real estate investments, as well as credit losses.

Q: How did Goldman Sachs’ investment banking and trading revenue fare during the second quarter?

A: Investment banking fees declined by 20%, while trading revenue for fixed income, currency, and commodities fell by 26% and equities trading saw a modest 1% increase.

Q: What changes did Goldman Sachs make to its business structure to mitigate losses?

A: Goldman Sachs merged its Marcus unit into its asset and wealth management arm and sold a significant portion of its Marcus loans portfolio.

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Q: What are Goldman Sachs’ plans for its commercial real estate-related investments?

A: The bank plans to sell approximately half of its commercial real estate-related investments within the next three to five years.

Q: How did Goldman Sachs’ asset and wealth management unit perform during the second quarter?

A: The unit experienced a 4% decrease in revenue, primarily due to losses from real estate investments. However, it recorded record fees and assets under supervision.

Q: How have the Federal Reserve’s interest-rate increases affected Goldman Sachs?

A: The interest-rate increases have impacted Goldman Sachs’ trading revenue and have led to predictions of a potential economic slowdown in the second half of the year.

Q: Has Goldman Sachs implemented any workforce reductions?

A: Yes, the bank has already laid off thousands of employees and may continue to do so if revenue does not rebound.

Q: What is Goldman Sachs’ outlook for the future?

A: While cautious about a potential economic slowdown, Goldman Sachs remains optimistic about opportunities for growth, particularly in the IPO market and stock market recovery.

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