Goldman’s earnings top estimates as deal deals from real estate firm GreenSky take a hit

NEW YORK (Reuters) – Goldman Sachs (GS.N)’s third-quarter profit fell less than expected as an emerging rebound in dealmaking offset an $864 million writedown related to its fintech business and GreenSky real estate investments.

Wall Street executives are more hopeful of a rebound in capital markets activities after dealmaking came to a near standstill in 2022 in the wake of heightened geopolitical risks in the wake of the war in Ukraine and aggressive monetary tightening by the Federal Reserve.

David Solomon, CEO of Goldman Sachs, said he expects the recovery to continue in both capital markets and strategic activity such as mergers and acquisitions.

“The work we are doing now provides us with a much stronger platform for 2024,” he said.

Goldman Sachs said on Tuesday that its net profits fell 33% to $2.06 billion, or $5.47 per share. Analysts on average were expecting earnings of $5.31 per share, according to LSEG data.

Shares of the bank were down 0.2% in late morning trading, while shares of Bank of America, which also announced Tuesday and beat estimates, rose 3.1%. Rival Morgan Stanley (MS.N) is scheduled to report earnings on Wednesday.

“It was a rocky quarter, but we believe exiting GreenSky was a good decision,” Keefe, Bruyette & Woods analyst David Conrad said in a note.

Goldman was the underwriter of high-profile initial public offerings (IPOs) in September, including SoftBank Group’s (9984.T) chip designer Arm Holdings and grocery delivery app Instacart (CART.O).

Stock sales sparked optimism about a recovery in the IPO market, but the poor performance after their debut, and the lukewarm reception of German sandal maker Birkenstock, raised doubts about the market’s strength.

Goldman’s investment banking fees of $1.55 billion were largely unchanged in the third quarter after falling by a fifth in the second quarter from a year earlier.

Equity underwriting revenues in the third quarter jumped by 26% compared to the previous year, while debt underwriting increased by 27%.

Goldman saw weakness in its fixed income, currencies and commodities (FICC) instruments, with net revenues down 6%. FICC results from other banks were mixed with Bank of America up 6% and JPMorgan up 1%.

The US Federal Reserve may raise interest rates again this year, while several bank executives said they expect borrowing costs to remain high for longer.

The weakness of consumer banking remains

Goldman Sachs, in which it lost $3 billion over three years, continued its ill-fated foray into consumer banking.

The bank took a $506 million writedown on GreenSky, which facilitates home improvement loans for consumers, and was sold to a consortium of investment firms led by Sixth Street Partners.

It was purchased for $1.7 billion last year even though it was worth $2.2 billion when the deal was first announced in 2021. Goldman took a $504 million charge on GreenSky in the second quarter.

Real estate investments were another drag on profits as the bank booked impairment charges of $358 million compared to $485 million in the second quarter.

This impacted revenues from its asset and wealth management unit, which fell 20% to $3.23 billion.

“Going forward, Goldman Sachs will likely face lower headwinds from severance costs, home equity impairment, and consumer loan exits,” said David Fanger, senior vice president at ratings agency Moody’s Investors Services.

Commercial real estate loans, which have emerged as a risk for banks as interest rates rise, accounted for 14% of Goldman’s total loan portfolio.

Solomon has shifted the firm’s focus back to its traditional strengths – investment banking and trading – and aims to grow in asset and wealth management.

Investment banking results were mixed relative to peers, with JPMorgan Chase (JPM.N) reporting a 6% decline in revenue, while Citigroup (CN) said fees jumped 34%. Morgan Stanley (MS.N) is scheduled to report earnings on Wednesday.

“Goldman Sachs remains highly oriented toward improving the investment banking environment and more reliant on it than its peers,” Moody’s Fanger said.

Goldman had 45,900 employees as of the end of September, up 3% from the previous quarter, but down nearly 7% from the same period a year ago. The bank has laid off thousands of employees this year, including a round of cuts in January that were the largest since the 2008 financial crisis.

“We believe the work we’ve done to right-size the company is something that now puts us in a position to make more selective investments in our headcount,” Chief Financial Officer Dennis Coleman told analysts on the phone.

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