Goldman's Profit Drops Amid Shift Away From Trading -- WSJ
April 16 2019 - 2:02AM
Dow Jones News
By Liz Hoffman
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (April 16, 2019).
Goldman Sachs Group Inc.'s first-quarter profit fell sharply as
trading and underwriting slowed, showing the urgency of the firm's
pivot away from those unpredictable Wall Street businesses.
The bank's profit of $2.25 billion, or $5.71 a share, was 21%
lower than the same period a year ago. Revenue fell in three of
Goldman's businesses and was flat in its fourth. Cost cuts and
lower taxes helped profits top muted expectations, but shares still
fell more than 3% in afternoon trading.
Goldman is in the midst of a multiyear effort to diversify away
from trading, where profits have dwindled since the financial
crisis. It is growing a consumer bank, developing a cash-management
product for corporate treasurers, partnering with Apple Inc. on its
first credit card and building data services it hopes will lure new
types of trading clients.
But the pivot is a slow one. The bank's first-quarter results
show that, for now, Goldman is stuck in limbo, spending more than
$1 billion on the new initiatives while still tethered to old
standbys that are struggling.
"We're looking to build value over the next three to five years,
not over the next couple of quarters," Chief Executive David
Solomon, who took the job last fall, said on a conference call with
analysts.
Trading revenue fell 18% from a year ago, when a burst of
volatility sparked activity. Declines were steepest in stock
trading as hedge funds placed fewer bets and calm markets lessened
the demand for instruments that protect against price swings.
Among other big U.S. banks, JPMorgan Chase & Co. reported a
17% decline in overall trading. Citigroup Inc. reported a 5% drop
on Monday.
But without the big retail businesses and lending books that
bolster JPMorgan and Citigroup when markets cool, Goldman is more
beholden to its traders and investment bankers. Investors being
asked for patience are looking for signs of progress.
To that end, Mr. Solomon and Chief Financial Officer Stephen
Scherr have set a slew of financial targets and on Monday promised
more. That kind of transparency is unusual for Goldman, which
historically shared little and relied on steady profits to placate
shareholders.
One number they are hyping is net interest income, the
difference between what Goldman earns on loans and what it pays for
its deposits. A number more traditionally associated with Main
Street lenders, it has been rising at Goldman as the firm leans
into lending and gathers retail deposits, a cheaper source of
funding.
Shareholders consider it a steadier source of revenue and so
tend to assign it a higher value. Goldman's net interest income
rose 50% from a year ago to $835 million, though it remains barely
a blip compared with JPMorgan's $14 billion.
Goldman's Marcus platform, launched in 2016 and expanded into
the U.K. last year, has $46 billion in deposits. They give Goldman
cheaper funding than borrowing overnight against its holdings of
securities.
The firm is wrapping up deep-dive reviews on each of its
business units and processes, trying to find costs to cut and solve
frustrations for clients. It has reassigned 7,500 engineers and
support staff from a centralized function into its operating
divisions to tackle high-priority projects and revamped how the
firm's most important clients are covered.
Even as it pushes into Main Street banking, Goldman also is
retreating from some corners of traditional high finance. Mr.
Scherr confirmed Monday that the firm would scale back in some
commodities trading and seek to raise outside capital for
investment funds rather than using its own money for deals.
Together those changes, earlier reported by The Wall Street
Journal, signify a cultural shift that emphasizes client service
over proprietary trading.
They are also likely to free up capital that could be returned
to shareholders or plowed back into new ventures. Regulators
require banks to hold extra capital if they engage in trading and
principal investing.
Goldman's return on equity, a closely watched measure of how
profitably the company spends shareholders' money, was 11.1% in the
quarter. The bank announced an increase of 5 cents to its per-share
quarterly dividend, to 85 cents, and continued buybacks that
brought the number of shares outstanding to an all-time low, which
boosts per-share earnings.
Write to Liz Hoffman at liz.hoffman@wsj.com
(END) Dow Jones Newswires
April 16, 2019 02:47 ET (06:47 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
Goldman Sachs (NYSE:GS)
Historical Stock Chart
From Aug 2024 to Sep 2024
Goldman Sachs (NYSE:GS)
Historical Stock Chart
From Sep 2023 to Sep 2024