Goldman Sachs: market leader’s cyclicality makes it market laggard

Tuesday was not the celebration that David Solomon was hoping for. Analysts wished the Goldman Sachs chief executive happy birthday on the bank’s earnings call. There was little to celebrate after that.

A deal dearth and Goldman’s disappointing foray into consumer banking could be distilled into a single figure: a measly 4.4 per cent annualised return on equity in the fourth quarter. That smacked of the tough times it was going through before the pandemic-related surge in trading and dealmaking.

Even Solomon, 61, was forced to concede the performance of the US investment bank was “disappointing”. On the same day, arch-rival Morgan Stanley reported that 2022 wealth management revenues hit nearly $25bn. Its return on equity of 9.2 per cent added to Goldman’s anguish.

Goldman’s franchise remains towering, but its core business remains inexorably tied to market cycles. That left the birthday boy simply hoping that sharp cost cuts and a “soft landing” for the economy would spark an eventual turnround.

In the first quarter of 2021, Goldman’s ROE hit a remarkable 31 per cent, a level more associated with its highly leveraged pre-2008 financial crisis days. As Solomon tried to explain, both 2021 and 2022 were polar opposites. In the opening quarter of 2021, Goldman generated $7bn of profits. For all of 2022, the firm mustered just $11bn.

The $3bn in losses that Goldman disclosed last week largely tied to investments in consumer finance can no longer be obscured by Goldman’s strength in institutional securities.

Goldman said the axing last week of 6 per cent of its workforce came after boosting headcount by a tenth in the previous period. On Tuesday, Solomon admitted that the company had been overconfident in its expectations for new businesses. Goldman is left hoping it can extract stable earnings from asset management fees as well as wringing more from corporate clients for new products.

Solomon noted that even amid all the flux, Goldman had still been able to grow book value steadily in recent years. After falling nearly 10 per cent on Tuesday its stock price is down nearly a fifth from its 2021 peak and trades at a price to book value ratio of 1.1 times.

A lot can happen in a year. Solomon will hope that the worst is over for Goldman by the time he is 62. If not, the world’s most famous investment bank may be back in the doldrums for good.