Goldman’s corporate loans, balance sheet investments eat away at profits

(Reuters) – Goldman Sachs Group Inc’s (GS.N) quarterly profit nearly halved, as it set aside more money to cover for corporate loans expected to go bust in the coming months and booked heavy losses on its debt and equity investments.

The Wall Street trading powerhouse on Wednesday also warned that it expects reduced revenue in its asset and wealth management businesses and a higher rate of client defaults in the aftermath of the coronavirus pandemic.

While total net revenue was flat at $8.74 billion, three out of the bank’s four business lines reported higher numbers. Analysts on average had expected revenue of $7.92 billion.

“Our quarterly profitability was inevitably affected by the economic dislocation,” said Chief Executive Officer David Solomon. “As public policy measures to stem the pandemic take root, I am firmly convinced that our firm will emerge well-positioned.”

Under Solomon, Goldman has been attempting to reduce its reliance on its flagship trading business and build out its consumer bank, although trading made a comeback in the quarter on that back wild swings in financial markets and accounted for nearly 60{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} of overall revenue.

Even as Goldman, under Solomon, has been trying to rework its business for the long term, this unusual period proved to be a lucky one for a bank without a major consumer lending arm.

“GS has less NII & credit risk than the big banks and it was good to see incremental profitability shine thru in the global markets and investment banking segments on the better volumes this quarter,” Evercore ISI Glenn Schorr said in a note.

Solomon has made growing Goldman’s consumer bank, Marcus, a top priority, and this quarter the division reported a $12-billion increase in deposits. He hopes to get Marcus deposits reach $125 billion in the next five years.

The bank’s net earnings applicable to common shareholders fell to $1.12 billion in the first quarter ended March 31 from $2.18 billion a year earlier. Earnings per share tumbled to $3.11 from $5.71.

Analysts on average had expected a profit of $3.35 per share, according to the IBES estimate from Refinitiv.

On Tuesday, JPMorgan Chase & Co (JPM.N) said its profit plunged by more than two-thirds in the first quarter as the largest U.S. bank put aside nearly $7 billion in reserves to protect it from a wave of potential loan defaults in the months ahead.

Wells Fargo also reported dismal numbers due to loan loss provisions.

Graphic – Goldman Sachs investment banking over the years: here

Interactive graphic reut.rs/3eg3qdj on Goldman Sachs investment banking

TRADING COMEBACK

The bank’s bond trading business had its best quarter in nearly five years. Fixed income revenue surged 33{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f}, while equities trading revenue jumped 22{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f}.

The strong performance in trading, however, was offset by weakness in its asset management reporting line, where it booked losses of $868 million from lending and debt investments.

Provision for credit losses was $937 million for the first quarter, compared with $224 million a year earlier and $336 million in the fourth quarter.

Net provisions for litigation and regulatory proceedings for the first quarter of 2020 were $184 million, compared with $37 million in the year-ago quarter.

Goldman also saw a 10{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} rise in operating expenses from a year earlier, primarily due to significantly higher expenses related to brokerage, clearing, exchange and distribution fees.

In January, Solomon also set goals that the bank achieve a 13{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} return on equity (ROE), over 14{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} return on tangible equity (ROTE) and a 60{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} efficiency ratio within the next three years.

The bank fell far short of those return targets this quarter, reporting an annualized ROE of 5.7{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} and ROTE of 6{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f}.

Most brokerages tracking the investment bank had factored in a slump in macroeconomic conditions as the fallout of the coronavirus crisis whipsawed the broader economy, and expectations were muted on key financial metrics.

Goldman’s main rival Morgan Stanley (MS.N) will report quarterly results on Thursday.

Goldman’s shares were down over 3{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} in premarket trade.