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By John Biers
Goldman Sachs reported a steep decline in fourth-quarter earnings Tuesday, on much lower merger activity in results that missed analyst expectations and weighed on shares. online news
The big investment bank pointed to a “significant decline” in completed mergers and acquisitions as fewer big companies bought rivals and the number of initial public offerings fell sharply compared with recent years.
Goldman’s profit drop comes on the heels of a trove of mixed results last week from other financial giants, with some large banks pointing to a “mild recession” as a likely scenario.
The results were also marred by nearly $1 billion in provisions set aside for Goldman’s consumer-oriented credit card business and the growing GreenSky home-improvement loan business.
The bank’s net income was $1.2 billion, down 69 percent following a 16 percent fall in revenues to $10.6 billion.
The fourth quarter marked Goldman’s fifth straight reported period of lower profits, compared with the year-ago quarter.
Shortly after midday, shares of Goldman were down 7.5 percent at $346.00, weighing on the Dow index.
Chief Executive David Solomon acknowledged that the results were “disappointing,” but emphasized that the company had achieved double-digit returns for all of 2022.
Executives highlighted a plan to scale back Goldman’s ambitious consumer banking operation and noted that results would be helped in 2023 by lower expenses after cutting 3,200 jobs earlier this month.
Investment banking fees were down 48 percent during the fourth quarter, a hit that was offset by a 44 percent jump in revenues tied to trading in fixed income, commodities and currencies.
Macro outlook ‘uncertain’
Solomon alluded to a cloudy outlook in 2023.
“There were headwinds we expected, like high inflation, but some we never thought we’d see like the ongoing war in Ukraine,” Solomon told analysts on a conference call.
“There aren’t many signs of widespread distress, balance sheets and company fundamentals are relatively healthy,” he said.
But he added that it is “clear that the outlook for 2023 remains uncertain.”
Solomon said the dramatic drop in merger-related revenues reflected an exceptional level of activity in late 2020 and 2021 due to heavy fiscal stimulus that was “not normal.”
That climate “pulled a lot of activity forward,” he said. “And then because of market disruption, we’ve tightened monetary conditions meaningfully in 2022.”
In October, Goldman announced it was streamlining its company to three operating segments from four, a move that reorganizes its “Marcus” consumer business which had hit obstacles.
Goldman executives said Tuesday they ceased offering new loans on the Marcus platform, while narrowing the “Platform Solutions” business to three areas: transaction banking; credit cards and GreenSky.
But as those operations ramp up, Goldman is setting aside provisions, said Chief Financial Officer Denis Coleman.
“Our focus remains singularly on driving towards profitability of this segment, but there will continue to be a period of time during which we lose money,” Coleman said.
jmb/bys
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Notes from APS Radio News
From the early part of March 2020 to April 15, 2022, the US Federal Reserve had been increasing its holdings by nearly $5 trillion dollars.
It did this each month of that period by buying billions of dollars of corporation and government bonds, in effect, infusing massive amounts of money into the economy.
And, as the FRED graph shows, it did so at rapid rate or at a high rate of velocity.
Economists say that when massive amoutns of fiat money are infused into the economy at high rates of velocity, the likelihood of noticeably higher rates of inflation is made greater.
A number of other central banks followed a similar policy.
For example, between late February 2020, even days before the media started fixating on the virus thingy, and March of last year, the European Central Bank embarked on its own version of monetary expansion.
During that period, the ECB increased its holdings by over 5 trillion euros.
The Bank of Japan also increased its holdings.
Between February of 2020 and earlier this year, it had increased its holding by a few hundred trillion Yen.
For a number of years, including the Bank of Japan, major central banks have kept their interest rates low.
For its part, the Bank of Japan kept its interest rates at negative rates, meaning that depositors had to pay banks to hold their money.
During and before the pandemic, major corporations had increased the number of mergers and acquisitions, as those entities were able to make their purchases using inexpensive money and higher stock valuations.
The other part of the equation was that of supply.
As a result of lockdowns, many small and medium-sized businesses were closed.
Shipping ports had lost workers, and truck drivers going to those ports had to wait in long lines, as a result.
In effect, well before Russia’s invasion of Ukraine, shortages of various goods and services developed.
The invasion and sanctions imposed have aggravated shortages of commodities like petroleum and grain.
And there have been instances of price gouging.
To the extent that money is more expensive to borrow, in the context of the Fed’s increasing interest rates—a number of times during the past year, the Federal Reserve increased interest rates by 75 basis points each time—the number of mergers and acqusitions decreases.
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