Goldman Plunges After Trading Revenue Miss

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by Tyler Durden
Tuesday, Jan 18, 2022 - 12:51 PM

One trading day after JPM reported disappointing earnings and its stock suffered the biggest post-earnings drop in a decade, moments ago Goldman joined it in the penalty box with its shares tumbling as much as 3.1% in premarket trading Tuesday after reporting worse-than-expected fourth-quarter trading revenue, even if overall revenue beat (Q4 revenue $12.6BN, Exp. $12.08BN), with EPS of $10.81 also coming in below expectations of $11.76. Total profit declined 13% to $3.94BN, even as revenues grew 8%. Still, this was a solid number in context: profit at JPMorgan fell 14% in the fourth quarter from a year earlier, while profit at Citigroup fell 26%.

While the bank’s FICC sales and trading revenue of $1.86 billion was higher than the average analyst forecast of $1.80, and flat Y/Y, while equity sales and trading revenue missed expectations, coming in at $2.12 billion versus the $2.47 billion seen by analysts and down 11% Y/Y, resulting in a miss in overall trading rev. of $3.99 billion, which came in below the estimate $4.27 billion, and was down 7%, as pandemic-induced volatility in capital markets subsided. Trading revenue fell 11% at JPMorgan and 17% at Citigroup.

According to Goldman, the reason for the miss is that "Equities net revenues were lower, reflecting significantly lower intermediation net revenues, partially offset by significantly higher financing net revenues." Furthermore, the "4Q 21 operating environment was characterized by challenging market-making conditions compared with 3Q 21, although activity levels remained solid, equity prices were generally higher and volatility increased."

On the other hand, and similar to JPM, investment banking revenue of $3.60 billion came in well above expectations $3.07 billion.

While not nearly as balance sheet intensive as other money center banks, Goldman reported Net Interest Income of $6.5 billion for 2021 and $1.795BN for Q4, both a significant increase from $4.75BN a year ago and from $1.4BN in Q4 2020.

In a concerning development, and just like JPMorgan, Goldman's compensation expenses came in red hot, at $3.25 billion, well above the estimate $2.89 billion, and up a whopping 31% to $3.25 billion (and one-time multi-million bonuses won't help with this trend). Total operating expenses were $7.27 billion, up 23% from the same period a year earlier.

Compensation expenses at Goldman Banks are in a battle to get and keep rainmakers who can maintain the momentum of the last couple of years. Wall Street firms including Goldman also raised salaries last year for junior bankers, many of whom found the grunt work of entry-level banking less appealing when they were doing it from home.

Digging deeper into comp, in simple dollar terms total compensation and benefits grew by $4.4 billion in 2021 at Goldman. Meanwhile, as Bloomberg notes, the bank's payouts to shareholders in dividends and buybacks grew by $3.8 billion. And remember payouts were restricted by regulators for most of 2020, so the total then ought to be artificially low. In other words, in a novel twist, Goldman is now paying its employees more than its shareholders.

And tied to that, Goldman has continued its recent on a hiring spree and its staff hit 43,900 at the end of 2021, up 2% from 43,000 three months earlier--and up 8% from 40,500 to close out 2020.

The bank’s return on equity, a measure of how profitably it uses shareholders’ money, was 23% in 2021 after a return of 11.1% in 2020. In January 2020, Goldman set a target return of at least 13% by 2023.

Also, as Bloolmberg observes, Goldman’s effective income tax rate for 2021 was an even 20%, a big drop from 2020’s 24.2% for 2020, with the bank crediting “a decrease in provisions for nondeductible litigation, partially offset by a decrease in the impact of tax benefits in 2021 compared to 2020.” Note also that the rate inched up after hitting 19.6% for 2021’s first nine months, because of “a decrease in the impact of tax benefits.”

“This is a disappointing quarter due to the big jump in expenses and the softness in equities,” writes Vital Knowledge founder Adam Crisafulli. “It also looks like their portfolio of equity investments was hurt by turbulent capital markets in Q4,” he added.

The stock is sharply lower premarket on the disappointing earnings, down over 4% and sinking.

The full Goldman investor presentation can be found here.