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Goldman Sachs’ new chief executive David Solomon has postponed an eagerly awaited strategic update by a year while promising the Wall Street bank would be “focused on new opportunities” such as retail banking after profits slumped by a fifth in the first quarter.
Despite the fall in earnings, Goldman’s profits were better than expected by analysts, in part after it cut pay costs by 20 per cent. The bank was hit by tough conditions for its trading business, lower private equity profits and smaller transaction revenues in its investment and lending divisions.
The fall in profits will raise questions about whether Goldman’s business focus and strategic priorities are appropriate for market conditions, in particular after rival JPMorgan set the record for the highest ever quarterly profit of a US bank during the same period.
“We are focused on new opportunities to grow and diversify our business mix and serve a broader range of clients globally,” said Mr Solomon, who promised a ‘front to back’ review of all of Goldman’s businesses soon after he took over in October.
“With improving momentum across our businesses, we are confident that Goldman Sachs will generate attractive returns for our shareholders,” he added.
Monday’s results included a brief overview of that review and gave some new detail, including an aspiration to increase UK and US deposits at its retail bank Marcus by more than $10bn a year “in the next few years” to help diversify Goldman’s funding mix.
Goldman promised to finalise its performance targets and review its financial disclosures “in the coming months”, ahead of an “comprehensive strategic update” in the first quarter of 2020.
The detail of the first-quarter earnings included net revenues of $8.8bn, in line with analysts’ expectations but down 13 per cent from a year earlier, as almost all of its key divisions posted lower levels of activity. Net income fell 21 per cent year on year, to $2.25bn.
The bank delivered earnings per share of $5.71 against the $4.89 expected, after cutting operating expenses by 11 per cent including the 20 per cent cut in compensation and benefits expenses. Shares were down 2 per cent in pre-market trade.
“Expense savings came through a lower employee compensation ratio this quarter, which we believe can be sustained,” said Marty Mosby, analyst at Vining Sparks.
Revenues in fixed income trading — an area where Goldman has struggled in recent years — fell 11 per cent year on year to $1.84bn, better than the 18 per cent fall in fixed income trading revenues reported by JPMorgan Chase last week.
Goldman’s equities trading revenues were 24 per cent lower year on year, at $1.77bn, “primarily due to significantly lower net revenues in equities client execution, particularly in derivatives, compared with a strong prior year period”, the bank said. JPMorgan’s equities revenues were down 14 per cent for the year.
Investment banking — which covers everything from advising clients on M&A to dealmaking — was up 1 per cent year on year to $1.8bn, including a 51 per cent rise in the financial advisory business driven by strong M&A volumes.
Litigation reserves for the quarter were $37m, down $7m from the same period in 2018, suggesting the bank has not made material new provisions to deal with the fallout from Malaysia’s 1MDB case, for which it is being sued in Malaysia and facing potential action from the US justice department. The bank booked $516m of litigation reserves in the fourth quarter.
Goldman shares have gained almost 21 per cent this year, outperforming the 16 per cent rise in the KBW US banks index and closest rival Morgan Stanley, which is up almost 16 per cent during the same period. But Goldman has lagged the 26 per cent rise in Citigroup’s shares in 2019 to date.
