In news that probably won’t surprise anyone, Goldman easily beat estimates Tuesday when the firm reported fourth quarter results.
Revenue of $11.74 billion was up 18%, and topped even the most optimistic forecast. The range was $8.81 billion to $10.97 billion. EPS was $12.08. I’m not even sure that’s comparable to estimates. Consensus was apparently looking for $7.31. (Pour one out for consensus.)
Net revenues were higher across every segment. The bank called the increase in trading “significant.”
If you’re curious as to what “significant” means, in the fourth quarter it meant that equities trading revenue was $2.39 billion. That represented a 40% YoY gain, and handily bested estimates. The street was looking for less than $2 billion.
FICC wasn’t as robust. In fact, $1.88 billion was a slight miss. The bank noted “significantly higher net revenues in credit products and commodities and higher net revenues in currencies, partially offset by significantly lower net revenues in interest rate products and lower net revenues in mortgages.”
All told, global markets revenue of $4.27 billion in the fourth quarter represented a 23% increase from Q4 2019, and easily cleared the bar. The market was looking for $3.98 billion.
In IB, revenue was $2.61 billion. If you’re keeping track at home, that’s up 27% from Q4 2019 and 33% from the third quarter. Equities underwriting in Q4 rose 195% YoY. The bank cited “higher industry-wide activity.” Debt underwriting, however, was down 12% (and 8% sequentially). Overall, underwriting revenue of $1.64 billion was up 68%. Advisory revenues rose 115% from Q3 and 28% from Q4 2019 thanks to (obviously) M&A.
Asset management (which used to be investing and lending before Goldman revamped how it breaks down results by division), looked decent. Net revenues of $3.21 billion in Q4 were up 7% on-year and 16% sequentially. Goldman noted “significantly lower net gains from investments in private equities, partially offset by significantly higher net gains from investments in public equities.” (You know what they say: “Go significantly, or go home.”)
Lending and debt investments jumped nearly 50% from Q4 2019 thanks to tighter corporate credit spreads during the quarter.
Finally, revenue in consumer and wealth management, which is home to Marcus and Goldman’s card venture with Apple, rose 17% (and 11% QoQ).
In consumer specifically (which is small for Goldman, but growing), revenues were $347 million. That sounds small. And it is. But “they’re coming for you,” so to speak. That figure represented a 52% increase from Q4 2019 on “higher deposit and credit card loan balances.”
Expenses for the quarter were down 19% from the same period a year ago and down 5% sequentially. There’s some fun, euphemistic color on that in the presentation, that finds Goldman using language that describes a number of readily identifiable events without naming them.
“The decrease in operating expenses compared with the fourth quarter of 2019 was primarily due to significantly lower net provisions for litigation and regulatory proceedings,” the bank said, adding that “in addition, travel and entertainment expenses and occupancy related expenses were lower.”
Goldman also noted that charitable contributions in the fourth quarter of 2020 were “significantly” higher.
The bank’s effective tax rate for 2020 was 24.2%. (What was yours?) That represented a drop from the first nine months, which the bank said was due to a decline in the impact of non-deductible litigation for the full year versus the first three quarters.
For 2020, Goldman’s revenue was $44.56 billion, the highest since 2009. EPS was $24.74. Among other highlights, Goldman reported record assets under management and the highest full-year trading revenues in a decade.
David Solomon praised “our people,” who he said “responded admirably to a series of professional and personal challenges, while working from home or in offices that were reshaped dramatically.”
It was only “thanks to their perseverance” that Goldman was “able to help clients navigate a difficult environment, and, as a result, achieve strong results across the franchise.”
Just God’s work, as it were.
I dunno about God but one thing I’ll say about working with Goldman PWM. Their IT systems are antiquated, their research is… in line with most sell-side research I’ve seen but their people are first rate. In a business where there are constant admin snags and snafus, that’s very very appealing.
I jsut finished Rana Foroohar’s excellent “Makers and Takers” and the question that comes to mind is: Did all this activity create a single job for an American outside the financial sector and Goldman itself?
Maybe all those charitable contributions in the 4th quarter created demand for gift coordinators at the not-for profits that were on the receiving end Goldman’s altruistic disgorgement of wealth.
I will go out on a limb here and say that if all the talent at Goldman over the last two generations had instead gone into adding to the future, productive capacity of the economy (robotics, AI, biotechnology, batteries, becoming entrepreneurs), the nation’s economy would be in a better position to compete against China.
What value add do they contribute? It would seem to a reasonable observer that they skim and take. Astute viewers of the landscape would expect to periodically hear about their successes at investing in new businesses, or emerging industries. Goldman does seem to be an epitome of financialization, sad to say.
When it comes to banks, I think of fee vs lending. Fee business is activity like asset and wealth management, investment banking, FI and equity trading, consumer banking. Lending is activity where the bank takes credit risk and does the borrow short / lend long thing. Most of 2020 you wanted (I think/thought) to stick to the best-positioned banks in the fee business. As long as wealth is abundant, fees will be had; it doesn’t matter to the fee businesses if the wealth is unequally distributed, lower-income families and small business are not their customers. Regulation was not a risk, other that the Fed’s stress testing. In 2021, you want (I think) to also be in the best-positioned banks in the lending business. They have lots of cash to lend and reserves to release, the economic picture is getting clearer, spreads are growing (fitfully), and you can avoid the ones with too much exposure to the more challenged credits. Regulation will start to be a risk again, but probably not until much later in the year. That’s how I see it, anyway. Not that the big and medium banks will be as sexy as some fintech rocketship, but if you’re reluctant to absorb $40 swings on LMND, there’s still reasons to look at the MS and JPM type of name.
I guess go significantly or go home is corporate policy. Goldman’s occasional missteps can cost billions but they do know how to make it back. I’ve never been inside the place but a few years ago I had the pleasure of being a pre-publication reviewer for the best business case study I’ve ever read which was set at the time when one of their trading execs was proposing a final pivot from a net short to a net long position in the subprime debt market. This was the move out of the big short. The case was over 100 pages and was based on a couple hundred citations including thousands of pages of documents submitted by the company at the time of Blankfein’s Congressional testimony on this topic. The machinations going on at this time were utterly fascinating and revealed a highly complex decision process. After reading about them at this level nothing about them, surprises me any more. However, they probably think they pay too much in taxes. My effective rate has averaged around 9% for the last decade. It will go up two brackets this year a bit because I’m now a widower.