Booming markets drove a surge in third-quarter earnings at Goldman Sachs’ trading and asset management businesses, helping the Wall Street bank to post its strongest profitability since 2010.
Goldman delivered an annualised return on equity of 17.5 per cent for the three months to the end of September, its highest quarterly return in a decade.
It far exceeded the “greater than 13 per cent” promised in January, when chief executive David Solomon laid out his plans to revive the 150-year-old bank’s fortunes by cutting costs and branching into new businesses such as online banking and cash management.
“We put out a plan and we believe we’re executing,” Mr Solomon told analysts as he revealed a near-doubling of Goldman’s third-quarter net income to $3.6bn. “We feel good as a leadership team as to how we’re progressing, but there’s more work to do.”
Revenues from Goldman’s fixed-income division, where investors have spent years pressing for cuts, were up 49 per cent to $2.5bn compared with a year earlier — the biggest rise of the four Wall Street banks to have reported third-quarter earnings so far.
Goldman’s asset management division increased quarterly revenues by 71 per cent, to just under $2.8bn, fuelled by a 139 per cent increase in the value of its equities holdings, as stock markets soared this summer.
Despite the increase in profitability, shares were flat by mid-morning. Analysts said it was too soon to declare victory on the company’s strategic transformation.
“You can’t annualise any quarter at Goldman because there’s too many components that are so volatile,” said Brennan Hawken, an analyst at UBS. He added that the US bank’s return on equity for the first nine months of the year was running at an annualised rate of just 8 per cent after big charges in the first two quarters.
Still, he commended Goldman for containing expenses in a “robust revenue environment”. Mr Solomon said that Goldman remained committed to delivering the $1.3bn in cost cuts it has pledged over three years; chief financial officer Stephen Scherr said it would “look at opportunities to go further”.
While analysts broadly praised the third quarter’s expectation-beating results, much of the outperformance came from areas where earnings were highly volatile, notably trading, investment banking and investments in equity and debt.
“The question is, can these three businesses continue on this favourable path,” said Marty Mosby, analyst at Vining Sparks. He forecast that “trading should begin to return to more normal levels in 2021 once investors have recalibrated their portfolios for the next financial conditions”.
Mr Scherr told analysts that the surge in trading revenues stemmed partly from gaining market share, which Goldman hopes to hold on to. He also predicted volatile markets for the remainder of the year, driven by the US election, the transition to a new benchmark to replace Libor and the fallout from the pandemic.
Investment banking fees for advising clients on deals and fundraisings were up 7 per cent to just under $2bn for the quarter, including a 134 per cent rise in fees for equity underwriting. Mr Solomon said mergers and acquisitions activity, which “screeched to a halt” earlier in the year, was returning as confidence among chief executives “meaningfully improved” in the third quarter.
Like other banks that have reported this week, Goldman was boosted by lower than expected loan loss charges, which came in at just $278m, versus $1.6bn in the second quarter.
Revenues at Goldman’s fledgling consumer and wealth management division rose 13 per cent in the quarter to just under $1.5bn. Mr Solomon said his team would “look broadly” at acquisitions that could accelerate the division’s growth, as it had done with the $750m purchase of United Capital last year.
Goldman would also look at potential asset management deals if they were “enhancing”, said Mr Solomon, speaking a week after rival Morgan Stanley announced the $7bn acquisition of investment management specialist Eaton Vance.
Overall, Goldman delivered diluted earnings per share of $9.68, far above the $5.57 expected by analysts and almost twice the $4.79 achieved in the third quarter of 2019. Revenues were up 30 per cent to almost $10.8bn.
Glenn Schorr, analyst at Evercore ISI, described it as a “savage quarter” for Goldman, albeit against an “almost ideal backdrop that included an 8 per cent move in the stock market, tightening credit spreads, rising CEO & consumer confidence and higher equity and interest rates volatility”.