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Having given up a side-gig in DJ-ing, Goldman Sachs boss David Solomon has one less distraction. Based on Goldman’s third-quarter performance, though, it will take even more than his undivided attention to make the Wall Street firm’s aspirational targets attainable.
Goldman reported a one-third year-on-year drop in earnings on Tuesday, in a quarter riddled with one-off charges. Those included a hit related to buy-now-pay-later lender GreenSky, which Goldman bought only two years ago, and is selling. Absent all that, Goldman would have made a return on equity of just over 10%. Not terrible by any means, and in line with analysts’ expectations for arch-rival Morgan Stanley this year, according to LSEG data, but far behind both universal giant JPMorgan and Solomon’s own target of around 15%.
The problem is less today’s numbers than uncertainty around tomorrow’s. In his five years as CEO, Solomon has set out to make the firm’s income more predictable. His flagship efforts have been a now-backpedaled consumer push and a charge into expanding wealth management. The consumer snafus may only have generated $6 billion or so of pre-tax losses in total, inconsequential for a company with $47 billion of revenue, but add to the general sense of unpredictability.
A bigger challenge is that wealth management is also wobbling around wildly. Even without the losses on real estate, the division made a return on equity of around 10% in the quarter, based on Breakingviews calculations, where wealth chief Marc Nachmann has targeted a mid-teens return. That depends partly on hard-to-predict investment gains and incentive fees, which are far below what Nachmann said in February he would regard as normal.
Ironically, the part of the business that once seemed least predictable is now the bit investors can most rely on. Trading revenue was basically flat year-on-year, but still remains about $9 billion higher than it was in 2019, on an annualized basis. Even with dealmaking fees in the doldrums, the investment-banking-and-markets division is making a return on equity of 12% already. It shouldn’t be hard to nudge that up to 15%.
As if all that didn’t make prognosticating hard enough, Goldman along with its peers will soon be subject to new capital rules, known as Basel 3, that banks generally agree could add 20% to the amount of equity they are forced to hold. If all else stays equal, that means a lower return on equity. Solomon, like his peers, is in full lobbying mode, but the final outcome is anyone’s guess. A 15% return target is a nice idea, but for now it’s just that.
Goldman Sachs reported $11.8 billion of revenue in the third quarter of 2023, a 1% decrease on the same period a year earlier. The Wall Street firm’s earnings fell by one-third year-over-year as it wrote down the value of real estate investments and retreated from a foray into buy-now-pay-later lending. Goldman recorded a $728 million pre-tax charge from the falling value of properties held on its balance sheet, and a $203 million hit from GreenSky, the consumer lending company that it bought in 2021 and is now selling. Fees from investment banking increased by 1% year-on-year, while revenue from trading fixed income and equity securities was flat. Goldman made a 7.1% return on equity in the quarter, on an annualized basis, which would have been 10.2% without one-off charges. Chief Executive David Solomon has targeted a return of 14% to 16%.
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