Goldman Tumbles After Big Revenue, EPS Miss; Loan Loss Provisions Soar 183%

We already knew that Goldman's consumer-facing group formerly known as Marcus and since renamed to Platform Solutions would have a dismal quarter, after the bank disclosed last Friday that the troubled segment incurred a whopping $1.2 billion loss for the first nine of last year, with losses accelerating by the year. The filing also showed pretax losses have mounted to $3 billion since the start of 2020 driven by a surge in bad loan provisions which surged to $942 million for the first nine of 2022.

So how did the rest of the bank perform? In a word: lousy, and as the bank reported moments ago, it missed bigly on both the top and bottom line, with overall revenues sliding 16% driven by "significantly lower" revenue in Asset and Wealth management and lower net revenues in Global Banking & Markets, and while equity Sales and Trading missed expectations, both FICC and Investment Banking came above consensus estimates. Here is the summary:

• Net revenue $10.59 billion, missing the estimate of $10.7 billion, -16% y/y
  • Global Banking & Markets net revenues $6.52 billion, -14% y/y
  • Investment banking revenue $1.87 billion, beating the estimate $1.64 billion
  • FICC sales & trading revenue $2.69 billion, +44% y/y, beating the estimate $2.37 billion
  • Equities sales & trading revenue $2.07 billion, -4.9% y/y, missing the estimate $2.14 billion
  • Advisory revenue $1.41 billion, -14% y/y, beating the estimate $1.03 billion
  • Equity underwriting rev. $183 million, -82% y/y, missing the estimate $238.5 million
  • Debt underwriting rev. $282 million, -70% y/y, missing the estimate $369.7 million
• EPS $3.32, missing the estimate of $5.48
  • The effective tax rate was just 16.5%, down from 16.9% for the first 9 months.

Similar to other banks, Goldman reported that its 4Q 22 provision for credit losses surged 183% to $972 million, reflecting provisions related to the credit card and point-of-sale loan portfolios, "primarily from growth and net charge-offs,and individual impairments on wholesale loans."

Oh how the mighty have fallen: In 2008 Goldman made a killing on subprime; in 2022/23 Goldman is getting killed by subprime.

The investment-banking giant has poured billions of dollars into its retail effort, which includes the Apple Card and specialty-lending platform GreenSky. That operation, which posted revenue of just $513 million for the quarter, has been a drag on earnings over the past three years.

Adding insult to injury, while revenues tumbled, expenses rose:

• Total operating expenses $8.09 billion, +11% y/y, estimate $7.36 billion
• Compensation expenses $3.76 billion, +16% y/y, estimate $3.28 billion

According to the bank operating expenses were 11% higher YoY, "reflecting higher compensation and benefits expenses, higher transaction based expenses, the inclusion of NNIP and GreenSky and impairments related to consolidated investments. Net provisions for litigation and regulatory proceedings for the fourth quarter of 2022 were $169 million compared with $182 million for the fourth quarter of 2021.

“Against a challenging economic backdrop, we delivered double-digit returns for our shareholders in 2022,” CEO David Solomon said in a statement Tuesday. “Our clear, near-term focus is realizing the benefits of our strategic realignment, which will strengthen our core businesses, scale our growth platforms and improve efficiency.”

As Bloomberg notes, the firm for the first time is showcasing the results of its key banking and trading units as a single division, an attempt to highlight its strengths relative to peers. As part of changes announced in October, Solomon also undid one of his own signature moves and reunited the wealth-management arm with the asset-management division.

Goldman also scaled back its ambitions for the consumer business, abandoning a goal to do business with the mass market. Key elements of that push have been dismantled, and what’s left has been set aside as the smallest stand-alone division, called Platform Solutions. That unit has been bolstered with the addition of the transaction-banking business.

Turning to the bank core's global banking and markets group, we find that - no surprise - net revenues were materially lower Y/Y:

• Investment banking fees were $1.87 billion, 48% lower than a strong fourth quarter of 2021, due to significantly lower net revenues in both Equity and Debt underwriting, reflecting a significant decline in industry-wide volumes, and lower net revenues in Advisory, reflecting a significant decline in industry-wide completed mergers and acquisitions transactions from elevated activity levels in the prior year period. The firm’s Investment banking fees backlog decreased compared with the end of the third quarter of 2022.
• Net revenues in FICC were $2.69 billion, 44% higher than the fourth quarter of 2021, primarily reflecting significantly higher net revenues in FICC intermediation, driven by significantly higher net revenues in interest rate products and commodities and higher net revenues in credit products, partially offset by significantly lower net revenues in currencies and mortgages. In addition, net revenues in FICC financing were significantly higher, primarily driven by secured lending. 
• Net revenues in Equities were $2.07 billion, 5% lower than the fourth quarter of 2021, due to lower net revenues in Equities intermediation, reflecting lower net revenues in both derivatives and cash products.
• Net revenues in Equities financing were higher, primarily reflecting increased client activity. Net revenues in Other were $(114) million, compared with $(59) million for the fourth quarter of 2021

But while Markets was solid, the bank's Asset and Wealth Management group was a disaster:

• Net revenues in Asset & Wealth Management were $3.56 billion for the fourth quarter of 2022, 27% lower than the fourth quarter of 2021 and 12% lower than the third quarter of 2022. The decrease compared with the fourth quarter of 2021 primarily reflected significantly lower net revenues in Equity investments and Debt investments.
• The decrease in Equity investments net revenues reflected significantly lower net gains from investments in private equities. The decrease in Debt investments net revenues reflected net mark-downs compared with net mark-ups in the prior year period and significantly lower net interest income.
• Incentive fees were significantly lower, primarily driven by harvesting in the prior year period.
• Private banking and lending net revenues were significantly higher, primarily reflecting higher deposit spreads, as well as higher loan and deposit balances.
• Management and other fees were higher, reflecting the inclusion of NNIP and a reduction in fee waivers on money market funds
  • During the year, Assets Under Supervision increased $77 billion to a record $2.55 trillion.
  • Net inflows from acquisitions/(dispositions) of $316 billion, substantially all from the acquisition of NNIP
  • Long-term net inflows of $50 billion and liquidity products net inflows of $16 billion
  • Net market depreciation of $305 billion, driven by fixed income and equity assets
• During the quarter, AUS increased $120 billion ,reflecting net market appreciation of $87billion, long-term net inflows of $22 billion and liquidity products net inflows of $11 billion.

The ugliest segment of all, however, was the infamous Platform Solutions which is where apparently all failing Goldman divisions go to die.

According to the report, net revenues in Platform Solutions were $513 million for the fourth quarter of 2022, 171% higher than the fourth quarter of 2021 and 36% higher than the third quarter of 2022.

• The increase in Consumer platforms net revenues primarily reflected significantly higher credit card balances.
• The increase in Transaction banking and other net revenues reflected higher deposit balances.

That was the good news; the bad news is that the group's provision for credit losses was $972 million for the fourth quarter of 2022, compared with $344 million for the fourth quarter of 2021 and $515 million for the third quarter of 2022. Provisions for the fourth quarter of 2022 reflected provisions related to the credit card and point-of-sale loan portfolios, primarily from growth and net charge-offs, and individual impairments on wholesale loans.  The firm’s allowance for credit losses was $6.32 billion as of December 31, 2022.

• Loan balance of $15 billion
• Net interest income of $513 million
• Active Consumer platforms customers of 13.4 million
• Transaction banking deposits of $70 billion

Elsewhere in the report we find the following:

• First, more bad news: Platform Solutions pretax loss $778 million
• But also some good news: Net interest income $2.07 billion, +16% y/y, beating estimates of $2.08 billion
• Annualized ROE +4.4%, estimate +7.42%
• Return on tangible equity +4.8%, estimate +8.13%
• Standardized CET1 ratio 15.1% vs. 14.2% y/y, estimate 14.3%
• Book value per share $303.55 vs. $284.39 y/y
• Efficiency ratio 76.4%, estimate 68.5%
• Assets under management $2.55 trillion, +3.1% y/y, estimate $2.48 trillion
• Total AUS net inflows $33 billion, -48% y/y, estimate $26.55 billion
• Loans $179 billion, estimate $178.67 billion

The bank’s return-on-equity for the year dropped to 10.2%, falling below the 14% to 16% target it set for itself earlier in 2022.

The bank also disclosed the following "other matters":

• On January 13, 2023, the Board of Directors of The Goldman Sachs Group, Inc. declared a dividend of $2.50 per common share to be paid on March 30, 2023 to common shareholders of record on March 2, 2023. 
• During the year, the firm returned $6.70 billion of capital to common shareholders, including $3.50 billion of common share repurchases (10.1 million shares at an average cost of $346.07) and $3.20 billion of common stock dividends. This included $2.38 billion of capital returned to common shareholders during the fourth quarter, including $1.50 billion of share repurchases (4.2 million shares at an average cost of $358.48) and $880 million of common stock dividends. 
• Global core liquid assets averaged $398 billion5 for 2022, compared with an average of $335 billion for 2021. Global core liquid assets averaged $409 billion5 for the fourth quarter of 2022, compared with an average of $417 billion for the third quarter of 2022.

With slumping revenues, surging expenses, the industrywide slowdown and threat of a recession later this year, it is no surprise the bank joined its peers and announced it would cut as much as 3,200 jobs last week, a record for the bank which until now had been on a historic hiring spree.

After dropping Friday on early news of its Platform Solutions weakness, Goldman stock dropped again as investor focused on the company's top and bottom line misses, and the surge in loan loss provisions, while ignoring the solid numbers reported by the bank's FICC sales and trading and investment banking divisions.

The company's full investor presentation is below (pdf link):