Goldman Sachs Profit Slumped by 33% as Solomon Urged Patience on the Pivot

Goldman Sachs Group Inc. has reported a second consecutive quarter marked by real estate writedowns and a prolonged downturn in dealmaking. This has resulted in the company's profitability falling to approximately half of the target it had set for itself.

‍

During the last quarter, property investments incurred a loss of $212 million in the equity book, and an additional $358 million in impairments contributed to a 33% decline in profit. Although trading revenue that exceeded analysts' expectations helped mitigate the impact, the company's shares initially declined by as much as 2.1% in response.

‍

This marks the eighth consecutive quarterly drop in profit for Goldman Sachs, and its return-on-equity currently stands at 7.1%, well below its self-set target of mid-teens. CEO David Solomon has been working to rejuvenate the bank's stock, shifting away from a consumer banking expansion and refocusing on core business lines.

‍

Solomon stated during a conference call with analysts, "I think you can get very comfortable with the mid-teens target for return on equity. We continue to be very optimistic about our view to deliver meaningfully higher returns to our shareholders."

‍

Investment bankers are keen to emphasize that the business may have reached its lowest point, and they anticipate a return to normalcy by 2024. However, the early signs of recovery in capital markets have been slow to manifest due to political uncertainty in Washington, concerns about rising interest rates, and ongoing conflicts worldwide.

‍

Solomon expects "a continued recovery in both capital markets and strategic activity if conditions remain conducive," as Goldman Sachs is the leader in M&A advisory and equity underwriting, and a resurgence in activity will likely benefit the company.

‍

Despite these efforts, Goldman Sachs' stock has declined by 1.8% to $308.80, and it is down over 25% from its record high in late 2021. It is on track for a second consecutive year of decline.

‍

The company has also been addressing increased scrutiny surrounding its CEO, who has been dealing with dissatisfaction within the ranks for much of the past year. Solomon received public support from the board's lead director last month, a move aimed at quelling some of the discontent.

‍

Last week, Goldman agreed to sell its GreenSky unit for less than half the price at which it valued the installment-lending platform less than two years ago. This resulted in a $504 million writedown linked to the sale in the second quarter, as well as an additional hit of around $65 million last quarter. A consortium of investment firms led by Sixth Street Partners took over GreenSky from Goldman.

‍

Goldman increased the portion of revenue allocated to employees in the third quarter, raising the ratio to 34.5% so far this year, adding $690 million compared to 2022. The firm had lowered this ratio last year due to losses from its consumer unit but later had to reverse that decision.

‍

While trading revenue remained relatively unchanged from the previous year, analysts had expected a 13% drop. Fixed-income traders generated $3.38 billion, outperforming analysts' estimates but still experiencing a 6% decline from the previous year. The equities business achieved $2.96 billion in revenue, marking an 8% increase. The trading division had benefitted from volatile markets during the pandemic and geopolitical events like Russia's invasion of Ukraine, and its more recent performance has not reached the same highs.

‍

The wealth management business at Goldman reported revenue of $3.23 billion, marking a 6% increase from the previous quarter. This reversed a trend of three consecutive quarters of declining revenue in this unit. Goldman has been focused on reducing its historical balance-sheet investments, which currently stand at $21 billion. The bank also raised $15 billion in gross third-party alternative fundraising, resulting in management fees of $2.4 billion for the quarter.

‍

In August, Goldman entered into an agreement to sell its investment-advisory business to Creative Planning LLC, signaling a shift in focus to the ultra-rich segment, where the company has traditionally been strong.

‍

In September, the firm underwent leadership changes in its transaction-banking business, addressing compliance issues. This move highlighted the challenges faced by one of the firm's newer ventures, as it expanded its cash-management services under Solomon's strategy for diversifying revenue sources.

‍