Goldman Traders Rescue Results From Investment-Banking Slump
Goldman Sachs was the last of the six biggest U.S. banks to post results, with investors scouring the reports for clues on the health of the economy.
July 18, 2022 at 02:16 PM
4 minute read
Goldman Sachs Group Inc.'s traders countered the industry's underwriting slump with revenue gains that raced past analysts' estimates.
The trading operation posted a 32% surge in second-quarter revenue that included another banner period for fixed income, which jumped 55%, the New York-based firm said Monday in a statement.
The gains helped ward off the steep slowdown in investment banking as the volatility that spurred gains for trading weighed on capital markets and asset management. The global markets business, which houses Goldman's traders, recorded $6.47 billion of revenue in the quarter with rates, commodities and currencies helping drive the fixed-income gains.
Goldman was the last of the six biggest U.S. banks to post results, with investors scouring the reports for clues on the health of the economy. Company executives last week said the U.S. is well-positioned to withstand fallout from surging inflation, even if rising interest rates push the economy into a recession in coming quarters. Bank bosses warned that a potent mix of hurdles are still a threat, including inflation and the impact of Russia's invasion of Ukraine.
Goldman shares have dropped about 23% this year, pushing its price-to-book value below 1 — an unwelcome development that tracks how investors value the firm's net assets. The stock climbed 3.7% to $304.74 at 8:37 a.m. in early New York trading.
Even as equity markets were hammered during the quarter, a rush by clients to reposition their books and adapt to growing global volatility helped boost the fixed-income business for major Wall Street firms. Citigroup Inc., the bank with the largest international exposure, handily beat expectations last week with an unexpectedly large haul from fixed-income operations.
Goldman Sachs's investment-banking revenue fell 41%, reflecting a sharp drop in underwriting, a decline that had been well-telegraphed as clients steered clear of capital markets. Analysts were expecting it to fall 46%. The merger-advisory business helped ward off a bigger drop, posting $1.2 billion in revenue — a figure that was almost double the numbers posted by the firm's closest rival in that business. JPMorgan Chase & Co. took the No. 2 position in the quarter.
Goldman's advisory dominance wasn't enough to counter the steep slump in the underwriting business, especially in equity capital markets, where revenue shriveled 89%.
One headwind for the market has been the implosion of the SPAC market as Goldman and other banks fled what had been a red-hot market for the blank-check vehicles they helped create. Goldman even pulled out of working with most SPACs it took public, spooked by new liability guidelines.
The firm's asset-management business, which includes the alternatives-investing platform, turned in revenue of $1.08 billion, a 79% drop. The unit tends to post volatile results because its own balance-sheet investments drive performance.
The bank has signaled its intent to turbocharge fundraising to get to a place where fees from managing outside capital outweigh investments. The company's balance sheet equity investments stand at $16 billion, down from $22 billion at the end of 2019. Those investments lost $221 million in the quarter on the broad selloff in markets.
The unit is facing a probe by the U.S. Securities and Exchange Commission focusing on the mutual-funds business in its asset-management arm. The inquiry is focused on whether some investments are in breach of metrics promised in marketing materials regarding environmental, social and governance criteria.
The consumer and wealth business posted revenue of $2.18 billion, a 25% increase from a year earlier. Revenue from consumer banking was up 67%, buoyed by significantly higher credit-card balances and a boost from net interest income that has helped big banks in recent months. The numbers also included two key acquisitions Goldman recently completed: the General Motors credit-cards business and the GreenSky Inc. deal it closed in March.
At its debut investor day in 2020, Goldman said its consumer business would break even by this year. It has pushed out that target and budgeted losses exceeding $1.2 billion this year, according to people with knowledge of the matter. The addition of new business lines, pandemic effects and the need to set aside more reserves in line with new accounting rules have contributed to that miss.
The bank's second-quarter provision for credit losses was $667 million, a result of its portfolio growth in credit cards as well as the impact of broad macroeconomic concerns, the firm said in its statement.
Sridhar Natarajan reports for Bloomberg News.
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