Goldman Sachs’ profits plunged two-thirds last quarter, missing expectations and capping a grim year that has forced the bank to embark on its largest cost-cutting exercise since the financial crisis.
It was the Wall Street bank’s fifth straight quarter of falling profits and Goldman has already moved to cut more than 3,000 jobs, slash bonuses and launch a review of spending.
The drop in fourth-quarter profit reported on Tuesday was led by a sharp slowdown in investment banking activity as higher interest rates and a weakening global economy ended a multi-year dealmaking boom.
“Simply said, our quarter was disappointing and our business mix proved particularly challenging,” Goldman chief executive David Solomon told investors. Shares in Goldman fell as much as 7 per cent.
Goldman’s performance was in sharp contrast to long-time investment banking and trading rival Morgan Stanley, which also reported fourth-quarter results on Tuesday and was boosted by the strength of its wealth management business. Morgan Stanley shares rose almost 7 per cent.
Solomon has tried to emulate Morgan Stanley by diversifying Goldman’s revenues into more stable business but has been unable to lessen the company’s reliance on investment banking and trading.
Goldman said that fourth-quarter net income fell to $1.3bn, short of analysts’ expectations of $2.2bn and down from $3.9bn in the same period last year.
Despite the declines from a record 2021, Goldman’s net income for the full year was $11.3bn, its second-best performance since 2009, according to Bloomberg data.
Solomon on Tuesday spoke of the need to “rightsize the firm for the current environment”, with the outlook for 2023 remaining “uncertain”.
Goldman this month cut roughly 6 per cent of its workforce, and chief financial officer Denis Coleman said this should save the bank “north of $200mn” in 2023.
But in the fourth quarter Goldman’s spending on compensation and benefits still increased 16 per cent year on year, well above analysts’ expectations for no change.
Coleman said the fight for bankers “remains really robust” and Goldman “had to strike the right balance” between cutting bonuses and retaining talent for when markets recovered.
Investment banking showed no signs of bouncing back in the fourth quarter, with revenues dropping 48 per cent to $1.9bn. It echoed declines reported last week by JPMorgan Chase, Bank of America and Citigroup.
Goldman said its backlog of deal activity fell quarter-on-quarter.
The bank’s newly formed consumer financial technology unit also hit profits last quarter, with the division slumping to a pre-tax loss of $778mn. That was largely due to provisions Goldman made to cover potential losses on loans.
Goldman is in the process of scaling back its consumer banking ambitions, folding its Marcus digital retail bank into its wealth management business and pausing work on new projects.
Solomon admitted that Goldman had “tried to do too much too quickly” in retail banking, following its first foray into the business in 2016.
Goldman also had to endure $660mn in losses from stock market investments the bank holds at its asset management business.
The brightest spot in earnings was in Goldman’s trading division, a business that in volatile markets can generate blockbuster profits but which investors dislike for its unpredictability and the amount of capital required to run it.
Fourth-quarter revenues from fixed income, currencies and commodities trading were $2.7bn, ahead of analysts’ estimates of $2.4bn, while revenues from equities were $2.1bn, matching forecasts.
Goldman’s average tangible common equity for the quarter was 4.8 per cent, well behind its target of 15 to 17 per cent, which the bank announced in February. For the full year, its return on tangible equity was 11 per cent.