Goldman Sachs defied the coronavirus crisis to earn as much in the second quarter of 2020 as it did a year earlier after a bonanza in bond trading offset a surge in loan loss provisions and another round of legal charges.
The Wall Street bank, which has been criticised for its continued commitment to fixed income trading since the financial crisis, reported net income of $2.42bn for the second quarter, unchanged from a year earlier, as it benefited from a 150 per cent surge in fixed income trading revenues.
“In a period where there’s enormous change and enormous volatility in markets, we became super busy, because our clients were super busy . . . I don’t view that as permanent,” David Solomon, Goldman Sachs chief executive, told analysts.
The same boom helped JPMorgan Chase to almost double its fixed income revenues in the second quarter and drove a 68 per cent rise at Citigroup.
The Goldman CEO added that his bank had “not seen the same level of activity over the course of the last five or six weeks”, though chief financial officer Stephen Scherr noted that it was too soon to make a “declarative statement” on future revenues.
However, JPMorgan Chase chief executive Jamie Dimon on Tuesday predicted revenues could halve later in the year.
Mr Solomon, who in January laid out a strategic plan to broaden Goldman’s activities so it would be less dependent on its trading and investment banking roots, stressed that the general economic outlook was uncertain.
Goldman’s fixed income performance from April to June was that division’s best quarterly haul in nine years, delivering revenues of $4.24bn compared with $1.7bn the year before as Goldman allocated more capital to the business.
Investors have been rapidly repositioning their portfolios to try to keep pace with the wild market swings caused by uncertainty around the coronavirus’ economic impact and shifts in interest rates, including the Federal Reserve’s cuts in March.
The bumper second quarter result brings the bank close to meeting additional capital demands from the Fed, which wants the bank to have a common equity tier 1 (CET1) ratio of 13.7 per cent by October. Goldman’s CET1 ratio was 13.6 per cent at the end of June, implying it had $13.60 of high-quality capital for every $100 of risk-weighted assets. Mr Scherr said Goldman was still working towards a ratio of 13 to 13.5 per cent over the medium term.
“[The] primary metrics we are watching for is continued growth in tangible book value, ability to sustain dividends and aggressive coverage of potential losses,” said Marty Mosby, analyst at Vining Sparks. “This quarter’s earnings strength, coupled with aggressive reserve builds, checks all three boxes.”
Goldman’s equities division put in its best quarterly performance in 11 years, increasing revenues by 46 per cent year on year to $2.94bn. Equity markets were also characterised by extreme volatility in the quarter, rising and falling on news of vaccines and outbreaks, as well as surprises in economic indicators such as unemployment.
Goldman’s investment banking revenues were up 36 per cent year on year, as the bank benefited from record fee levels across the industry. The bank also enjoyed $635m of gains on its $2.6bn portfolio of public equity.
The strong performance from those core businesses helped Goldman to record second quarter net revenues across the group of $13.3bn and earnings per share of $6.26, far better than the $3.78 predicted by analysts.
Goldman’s return on tangible equity was 11.8 per cent for the quarter, almost double the 6 per cent return on tangible equity in the first quarter and within striking distance of the 14 per cent returns Goldman has promised by 2022.
Provisions for loan losses came in at $1.59bn, versus $937m in the first quarter, when the Covid-19 crisis began to bite. Goldman said the increase was “primarily” linked to provisions against loans in its corporate book because of “continued pressure in the energy sector” and the economic fallout from the pandemic.
Still, Goldman’s consumer and wealth management division, which includes its online bank Marcus and its Apple credit card, swung to a $131m loss, after taking $317m of provisions for credit losses.
The litigation charge of $945m was well above the $66m taken in the second quarter of 2019. Most of the charge relates to continuing cases surrounding the 1MDB multibillion dollar bribery and money-laundering scandal, a person familiar with the situation said. Goldman remains in protracted negotiations with the Department of Justice about a potential settlement over the fraud, which one of its former partners has already pleaded guilty to participating in.
“These [litigation charges] will no doubt be necessary to settle the 1MDB and other matters but still is an unusually large amount,” Chris Kotowski, analyst at Oppenheimer wrote in a note to clients, where he described the quarter as a “blowout’ for Goldman.
Shares in the bank rose almost 2 per cent in early New York trading.
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