A trading and investment banking boom swept Goldman Sachs to record fourth-quarter revenues, helping the Wall Street bank to more than double its profits and allowing management to claim an early victory in their plan to lift returns.
Goldman on Tuesday posted net income of $4.5bn for the final three months of 2020, up 135 per cent year on year. Revenue rose 18 per cent to $11.7bn, the highest ever for a fourth quarter. Earnings per share, at $12.08, were well above the $7.06 expected by analysts in a Bloomberg poll, in a results season in which the other big banks, such as JPMorgan Chase, also beat expectations but by smaller margins.
Shares in Goldman were down almost 1 per cent in mid-morning trading, after executives admitted the Covid-19 crisis meant its fledgling consumer banking business would now break even in 2022 rather than 2021, as originally expected.
The US bank’s mix of business lines had put it in position to be a major beneficiary of a trading and investment banking bonanza in the fourth quarter, as volatility and central bank support amid the pandemic drove revenues in its markets division.
Meanwhile, a flurry of stock market listings and a rebound in mergers and acquisitions in the second half of the year heralded big paydays for advisers in its investment banking division. “All of our competitors have showed up in spades, and yet we have (made) very significant share gains,” said Goldman chief executive David Solomon.
“It was an exceptionally strong quarter,” said Chris Kotowski, analyst at Oppenheimer.
Goldman recorded a 40 per cent increase in equities trading revenues, the second biggest reported by a Wall Street bank so far, behind only Citigroup. Fixed-income trading revenues rose 6 per cent, behind JPMorgan and in line with Citi.
Bank of America, which also reported earnings on Tuesday, suffered a 5 per cent fall in fixed income revenues but increased its equities and investment banking revenues by 30 per cent and 26 per cent, respectively.
“I think as long as equity markets stay robust, we could see significant [capital markets] activity in 2021 with respect to new issuance in equity, as interest rates change and we grind out of this pandemic,” said BofA chief financial officer Paul Donofrio. “You’re going to see a lot of activity in fixed income [too].”
Goldman’s comparisons with 2019 are flattered by a sharp fall in litigation charges, which took a $1bn chunk out of fourth-quarter earnings a year ago as the bank set aside money to deal with the 1MDB money laundering and bribery scandal. The quarter also benefited from $1.8bn of gains on equity investments that Goldman holds in its asset management division.
On Tuesday the US bank reaffirmed its strategic plan, which was unveiled a year ago by Mr Solomon and pivots Goldman from its roots in trading and investment banking towards areas including cash management and digital consumer banking.
Still, Mr Solomon said the consumer bank would break-even “one year later than anticipated due to business adjustments driven by Covid”, referencing the bank’s decision to “deliberately slow” lending as the pandemic raged.
The consumer bank’s profitability will also be hit by the development cost of things such as Goldman’s new checking account and Marcus Invest, which will be expanded to the UK in the second half of the year to offer investment advice to online banking customers there.
Mr Solomon stressed that those investments “will not affect our ability to meet our enterprise-level targets (on profitability)”. Goldman recorded a return on equity of 22.5 per cent in the third quarter. Mr Solomon has pledged a medium-term return on equity target of 14 per cent as part of the strategic plan. The bank said it had already delivered half of the $1.3bn of cost savings it was targeting over three years.
Marty Mosby, an analyst at Vining Spark, said Goldman was “moving along the path” it outlined a year ago and would not be distracted from that “just because they have this shot in the arm from markets revenues that goes away as quickly as it comes in”.
Goldman’s chief financial officer Stephen Scherr said the “opportunity set” for markets revenue in 2021 was not as strong as it was last year. He added that the US bank had a “structurally more profitable business” after cutting $400m from its global markets cost base in the last year.
Glenn Schorr, analyst at Evercore ISI, said Goldman had made progress in creating “a more durable earnings stream with higher returns by growing and strengthening existing businesses, diversifying their products and services and operating more efficiently”.
Despite a full-year revenue surge of 22 per cent, Goldman increased pay by only 8 per cent.
Revenues in consumer banking rose 17 per cent year on year, to $1.6bn, as the bank expanded its loan book to $8bn and deposits to $97bn. The retail operation is still relatively small, accounting for less than 15 per cent of total revenues.
Goldman’s size means it did not benefit from the multibillion-dollar release of loan loss reserves that lifted Citigroup and JPMorgan Chase in the quarter. Goldman booked provision charges of $293m for the period, as the prospect of higher loan losses on its credit cards more than offset lower reserves on its wholesale loans.
The relatively small size of its retail bank also means Goldman is less affected by fears about net interest margins and muted demand for loans, which led to a fall in Bank of America’s shares even as it reported a 12 per cent increase in net income for the fourth quarter.
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