Investment banking giant Goldman Sachs (New York Stock Exchange:GS) reported one of his biggest profit losses last month. The company is shifting gears among its various businesses and trying to cut losses (in certain segments) and rising costs. With the possible impact of a looming recession further pushing down the cost effectiveness from the bank, I prefer to stay on the sidelines. I am neutral in actions.
Goldman reported its biggest profit loss in a decade
On January 17, Goldman Sachs reported disappointing fourth quarter results. Both the top and bottom results missed Street’s expectations amid falling transactions and weak consumer business results. Earnings of $3.32 per share it was down 69.3% year-over-year due to higher costs and was much lower than the consensus estimate of $5.56, marking the biggest miss in the last 10 years.
Revenue also fell 16% to $10.59 billion, below expectations by $320 million due to significantly lower net income in Asset & Wealth Management (down 27% year-over-year) and Global Banking & Markets (down 27% year-over-year). 27% less year over year) .
Goldman is shifting gears, reorganizing and cutting costs
Goldman is in the process of modernizing its business model, refocusing its attention on its core businesses. The bank’s business has always been capital intensive. The company is shifting from a “balance sheet-intensive asset management business to a customer-focused, fee-based business,” as management highlighted during the fourth-quarter earnings call. This implies that, in the future, there will be a greater focus on asset and wealth management fees, as well as platform solutions.
According to a recent Wall Street Journal report, the Federal Reserve has been actively investigating the retail and consumer banking business of GS:Marcus. The investigation includes an assessment of whether adequate monitoring and control systems were used before expanding the business that reported mounting losses. GS reported that the unit had $3 billion in cumulative losses since 2020. Likewise, the company now plans to significantly reduce its focus on Marcus, which launched in 2016.
In addition, Goldman Sachs’ asset management unit is significantly reducing your alternative investments worth $59 billion over the next few years. Such investments had a significant negative impact on fiscal year 22 earnings.
The company has even changed its information on the business segments. Asset and wealth management have been combined into one segment, with investment banking and markets becoming the second segment. The third new segment, Platform Solutions, will include its fintech platforms, including transaction banking, card platform, consumer associations and its GreenSky point-of-sale lending business.
Its platform solutions business posted 135% year-over-year growth in net revenue in fiscal 2022. However, it was loss-making, with a net loss of $1.7 billion reported in fiscal 2022.
Earlier this month, the company announced thousands of layoffs to take place in January, the biggest job cuts the company has seen since the subprime crisis.
Hinting at further hardship for the company, it was revealed last week that CEO David Solomon’s salary has been cut by nearly 30% to $25 million by 2022. While the company cited a challenging operating environment as the reason, the move left many doubts. in the minds of investors. Perhaps they’ll get more details of what’s to come next during Goldman Sachs’ investor day scheduled for February 28.
GS is building its reserves in anticipation of a recession
Instead of an impending recession, banks are slowly building up their loan loss reserves. During the fourth quarter, GS increased its provision for credit losses 89% sequentially and 183% year-over-year to $972 million. On a full-year basis, its provision for credit losses was $2.72 billion, a whopping 661% increase. The bank attributed the jump to a growing credit card portfolio, macroeconomic and geopolitical concerns and net charge-offs.
During the fourth quarter earnings call, Chief Financial Officer Denis Coleman commented that the reserve build “started on top of last year’s balance and will continue into the following year.” Above-normal loan loss reserves, in the event of a more severe recession, could be a further drag on profitability in coming quarters.
Are GS shares buy, sell or hold, according to analysts?
Returning to Wall Street, analysts are cautiously bullish on Goldman Sachs stock and have a Moderate Buy consensus rating, which is based on nine Buys and six Holds. GS Average Stock Price Forecast of $401.08 implies an upside potential of 8.17%.
Valuation wise, GS shares look relatively cheap with a price-to-book ratio of around 1.2x compared to peers like Morgan Stanley (New York Stock Exchange:MS), which is trading at levels above 1.8x.
On the downside, Goldman’s return on tangible equity (ROTE) fell to 4.8% during the recently reported fourth quarter compared with 16.4% in the prior-year period. For FY2022, ROTE dropped to 11% compared to 24.3% reported in FY2021. These numbers clearly indicate the decline in profitability at Goldman Sachs over the past year.
Final Thoughts: Stay Away Until Positive Signs Emerge
The company is clearly in the midst of a strategic realignment and trying to fix several problems simultaneously. The successful implementation of your business reorganization may take several quarters, if not longer.
Therefore, I will stand by and might consider buying the shares if the restructuring starts to translate into better earnings and profitability indicators.
