Goldman Sachs' third quarter financial report released on Tuesday showed a 33% decrease in profit, driven by losses from the sale of some consumer loan businesses and a significant decline in revenue from its asset and wealth management departments.
This is Goldman Sachs' eighth consecutive quarterly report of a year-on-year decline in profits. The stock fell 1.6%.
The third quarter results reflect the financial shock Goldman Sachs is experiencing, as the company has now scaled back its ambitious goal of exiting its once high-profile consumer loan business. Last week, Goldman Sachs announced the sale of its professional lending subsidiary, GreenSky, and sold almost all personal loan balances.
From the perspective of the entire industry, large banks are dealing with the problem of slowing down transaction matching. The market showed some signs of recovery in the third quarter, but the situation where interest rates will remain high for a longer period of time has left the market still sluggish.
Under the leadership of CEO David Solomon, Goldman Sachs has pinned its hopes for revenue diversification primarily on its asset and wealth management businesses. The department's revenue decreased by 20%, partly due to a one-time write down.
Goldman Sachs included multiple expenses that led to a decrease in pre tax profit of nearly $1 billion. The previous investment writedowns in the asset and wealth management department amounted to $728 million, while GreenSky lost another $203 million. Overall, these expenses reduced the annualized return on equity in the third quarter by 3.1 percentage points to 7.1%.
Goldman Sachs reported a third quarter profit of $2.1 billion. This is equivalent to earnings per share of $5.47, higher than the $5.42 expected by analysts surveyed by FactSet.
The revenue for the quarter was $11.8 billion, a decrease of 1% compared to the same period last year. But it still exceeded analysts' expectations of $11.2 billion.
At the same time, competitors such as JPMorgan and Wells Fargo have achieved substantial profits throughout the year, thanks to the departments that provide loans to households and commercial enterprises. JPMorgan Chase reported a 35% increase in net profit for the third quarter last week, while Wells Fargo Bank reported a 61% increase in net profit for the third quarter.
Bank of America also released its performance report on Tuesday, stating that its profits increased by 10%. Bank of America's stock price rose 2.3%.
Su Dewei stated that despite the Federal Reserve's active interest rate hikes, the US economy has maintained growth momentum. But he also stated that it is expected that the impact of rising interest rates will be fully reflected in various industries within next year.
He said, "I still believe that the impact of this tightening policy is lagging behind, and we will see more recession in various areas of the economy." He said, this does not necessarily mean that there will be an economic recession.
The expense income of investment banking business in the quarter was $1.6 billion, basically unchanged from the same period last year. Goldman Sachs stated that its future trading reserves have decreased. JPMorgan Chase's investment banking revenue decreased by 3%, while Bank of America increased by 4%.
Investment banking business may recover very quickly, "said Alastair Borthwick, Chief Financial Officer of Bank of America. We are just getting increasingly tired of predicting when this situation will occur
The recent rise in initial public offerings (IPOs) has made bank executives yearn for a brighter future. Banking professionals stated in the third quarter that CEOs are now more willing to discuss the possibility of listing their companies or even acquiring competitors. Since this year's Labor Day, Goldman Sachs has served as the lead or co lead arranger for several major IPOs.
The latest data released earlier this month showed that the US inflation rate in September was still higher than the Federal Reserve's target, increasing the likelihood that the Federal Reserve will maintain short-term interest rates at higher levels for longer than expected by banking professionals and businesses. Subsequently, the upward trend of IPO activity began to slow down. Many companies are currently in a wait-and-see state, and some companies are now saying that they will wait until next year to make major moves.
The outbreak of the Middle East war this month may bring new uncertainty, especially if more countries are involved. Oil prices have declined slightly this month, but banking professionals are concerned whether this war will push up oil prices, thereby causing inflation to continue to rise.
According to Dealogic's data, the total amount of global M&A transactions decreased by 28% year-on-year in the first three quarters of this year. The total amount of IPO financing decreased by 30% year-on-year.
In the third quarter, Goldman Sachs' trading department's revenue was $6.3 billion, basically unchanged year-on-year. JPMorgan Chase's trading revenue decreased by 3% year-on-year, while Citigroup's trading revenue increased by 10% year-on-year.
Goldman Sachs is increasing its lending to investment banks and trading clients. The revenue from providing financing for fixed income and commodity clients has reached a record high.
Michael Farr, Chief Market Strategist at Highpower Advisors, said he is pleased to see Goldman Sachs return to its old Wall Street practice, as he can withstand the ups and downs of banking and trading operations. The company holds shares in Goldman Sachs.
He said that Goldman Sachs "will no longer create a 30% return on equity". He said, "However, I think the company is valuable because it is flexible and agile, and has always been good at capturing market opportunities
Su Dewei has been working hard to reduce Goldman Sachs' reliance on highly volatile investment banking and trading businesses, and currently Goldman Sachs is strengthening its focus on asset and wealth management businesses.
Under the leadership of Su Dewei, Goldman Sachs has been adjusting its asset management business to reduce the company's dependence on its own funds for investment, and to focus more on the handling fee income of its persistent customer wealth management business.
As part of the transformation plan, Goldman Sachs is selling assets on the company's balance sheet. The timing for the sale of this batch of assets is not good, as the valuations of several asset classes, including commercial real estate, have already declined.
The resulting write downs have led to a sharp decline in revenue for asset and wealth management subsidiaries. Goldman Sachs stated that the company incurred net losses in real estate and other investments. These losses reflect the impact of the bank's assets that have been sold and assets that have decreased in value but have not yet been sold.
Goldman Sachs' asset and wealth management subsidiaries set a new high in management fees and other handling fees revenue for the quarter. These revenues have a critical impact on Goldman Sachs' goal of obtaining a stable source of income through proxy wealth management and investment.