Goldman Jumps As Traders Spark Q2 Revenue Beat But Total Earnings Plunge 47% Amid Major Investment Losses

Concluding the big banks’ Q2 reports, which had been at best mediocre with more banks missing than beating estimates, on Monday morning Goldman Sachs reported a 47% drop in second-quarter profits, as the Wall Street giant suffered from a slowdown in investment banking fees and plummeting revenues in asset management, offset by a jump in trading.

In Q2 earnings, Goldman reported net earnings of $2.9BN or $7.73 per share (which is with the bank’s effective income tax rate of 16.3%, up from 15.4% last quarter), down a whopping 47% from $5.5BN or $15.02 per share in the same period last year; but well ahead of consensus estimates for $2.6bn or $6.65 per share. Net revenues for the first quarter totaled $11.9BN, down 23% from $15.4BN a year earlier and 8% lower from Q1 2022, but also beating analysts’ forecast for $10.7BN. The decrease reflected significantly lower net revenues in Asset Management and Investment Banking, where revenue fell 41%, offset by significantly higher net revenues in Global Markets and Consumer & Wealth Management, especially a remarkable 32% surge in trading revenue.

The culprit for the big drop was investment banking, where revenue were down 41% Y/Y and 11% lower Q/Q to $2.1bn, in line with analysts’ estimates for $2.1bn. The decrease compared with the second quarter of 2021 primarily reflected significantly lower net revenues in Underwriting. The decline was slightly less than that noted by rivals JPMorgan Chase and Morgan Stanley who reported falls of 61% and 55% respectively in investment banking revenue, as banking activity froze up in Q2.

According to Goldman, the decrease compared with the second quarter of 2021 primarily reflected significantly lower net revenues in Underwriting. The decrease in Underwriting was due to significantly lower net revenues in both Equity and Debt underwriting, reflecting a significant decline in industry-wide volumes. Net revenues in Financial advisory were slightly lower, reflecting a decrease in industrywide completed mergers and acquisitions transactions. Corporate lending net revenues were significantly higher, primarily due to net gains from hedges related to relationship lending activities and higher net revenues from transaction banking, partially offset by net mark-downs on acquisition financing activities. Here are the details:

• Equity underwriting rev. $131 million, missing the estimate $268.1 million
• Debt underwriting rev. $457 million, missing the estimate $571.3 million
• Financial advisory revenue $1.20 billion, beating the estimate $1.04 billion

And visually:

There was more bad news in Asset Management (loosely Goldman prop), where net revenues were just $1.08 billion for Q2, a massive 79% lower than the second quarter of 2021 if 99% higher than the first quarter of 2022 when stocks crashed. According to Goldman, the decrease compared with the second quarter of 2021 reflected “significant mark-to-market net losses” in Equity investments and significantly lower net revenues in Lending and debt investments, partially offset by significantly higher Management and other fees, to wit:

• Private: 2Q 22 ~ $440 million, compared to 2Q 21 ~ $2,815 million
• Public: 2Q 22 ~ $(660) million, compared to 2Q 21 ~ $900 million

Extending the discussion on the dismal performance by the group, Goldman writes that “macroeconomic concerns and the prolonged war in Ukraine continued to contribute to the volatility in global equity prices and wider credit spreads. As a result, net losses in Equity investments reflected significant mark-to-market net losses from investments in public equities and significantly lower net gains from investments in private equities, compared with a strong prior year period. The decrease in Lending and debt investments net revenues primarily reflected mark-downs on debt securities and loans compared with net gains in the prior year period. The increase in Management and other fees reflected the inclusion of NNIP5 and the impact of fee waivers on money market funds in the prior year period. Incentive fees were higher, driven by harvesting.”

Goldman also provided the following useful breakdown of the bank’s equity and debt investments:

The weakness in iBanking and Asset Management was modestly offset by a stronger than expected quarter for the bank’s Global Markets group, where net revenues rose 32% Y/Y from Q2, 2021 to $6.47 billion, if 18% lower than the first quarter of 2022. The number was a nearly $1 billion beat to the consensus expectation of $5.82 billion.

Some more details:

• Q2 FICC net revenues were $3.61 billion, 55% higher than the second quarter of 2021, and well above the $3.11 billion consensus, “primarily reflecting significantly higher net revenues in FICC intermediation, driven by significantly higher net revenues in interest rate products, commodities and currencies, partially offset by significantly lower net revenues in mortgages and credit products. Net revenues in FICC financing were significantly higher, primarily driven by mortgage lending and repurchase agreements.”
• Q2 Equity net revenues were $2.86 billion, 11% higher than Q2 2021, and also beating estimates of $2.71 billion, due to significantly higher net revenues in Equities financing, primarily reflecting increased activity. Net revenues in Equities intermediation were slightly lower, reflecting significantly lower net revenues in cash products, partially offset by higher net revenues in derivatives.

Elsewhere, revenues in Consumer & Wealth Management were $2.18 billion for the second quarter of 2022, 25% higher than the second quarter of 2021 and 3% higher than the first quarter of 2022. Net revenues in Wealth management were $1.57 billion, 13% higher than the second quarter of 2021, due to higher Management and other fees, reflecting higher placement fees and the impact of higher average assets under supervision, and higher net revenues in Private banking and lending, reflecting higher loan and deposit balances. Net revenues in Consumer banking were $608 million, 67% higher than the second quarter of 2021, primarily reflecting significantly higher credit card balances and higher deposit balances.

Curiously, even though Goldman has the smallest “balance sheet” of all big banks, the vampire squid said that its provision for credit losses was a surprisingly higher $667 million for the second quarter of 2022, compared with a net benefit of $92 million in the second quarter of 2021 and net provisions of $561 million in the first quarter of 2022. The bank revealed that “provisions for the second quarter of 2022 reflected portfolio growth (primarily in credit cards) and the impact of broad macroeconomic concerns.” Overall, the firm’s allowance for credit losses was $5.27 billion as of June 30, 2022.

And while looking at the balance sheet, Goldman reported Net Interest Income of $1.734BN, up $105MM from $1.628BN a year ago, and “reflected an increase in net interest income primarily reflected higher loan balance, partially offset by higher funding costs.”

On the expense side, Goldman managed to cut spending by an impressive 11% Y/Y, disclosing operating expenses of $7.65 billion for the second quarter of 2022, and essentially unchanged compared with the first quarter of 2022. The firm’s efficiency ratio for the first half of 2022 was 62.0%, compared with 54.6% for the first half of 2021.

According to the release, the decrease in operating expenses compared with the second quarter of 2021 “was primarily due to significantly lower compensation and benefits expenses” as well as lower net provisions for litigation and regulatory proceedings. These decreases were partially offset by increases from the inclusion of NNIP and GreenSky, Inc., transaction based expenses, market development expenses, professional fees and technology expenses.

Commenting on the quarter, Goldman’s resident DJ and CEO, David Solomon, said “we delivered solid results in the second quarter as clients turned to us for our expertise and execution in these challenging markets.” And “despite increased volatility and uncertainty” which sent net income plunging 47% to just $2.93 billion, Solomon said that he remains “confident in our ability to navigate the environment, dynamically manage our resources and drive long-term, accretive returns for shareholders.”

In kneejerk reaction to the stronger than expected sales and trading numbers (and generally ignoring the disappointing asset management and ibanking results), Goldman stocks surged above $300, rising as much as 4%, and was last trading $11 higher at $305, the highest price since early June.

The full Goldman presentation is below (pdf link).