Goldman profit tops estimates as dealmaking cushions hit from Greensky, real estate

NEW YORK, Oct 17 (Reuters) – Goldman Sachs’ ( GSN ) third-quarter profit fell short of expectations, offset by an $864 million writedown related to Greensky’s fintech business and real estate investments.

Wall Street executives have high hopes for a rebound in capital market activity after the deal nearly stalled in 2022 amid heightened geopolitical risk following the war in Ukraine and the Federal Reserve’s aggressive monetary tightening.

David Solomon, chief executive of Goldman Sachs, said he expects continued recovery in both capital markets and strategic activities such as mergers and acquisitions.

“The work we are doing now provides a very strong platform for 2024,” he said.

Goldman Sachs said on Tuesday that net profit fell 33% to $2.06 billion, or $5.47 a share. Analysts on average were expecting earnings of $5.31 per share, according to LSEG data.

The bank’s shares fell 0.2% in morning trading, while Bank of America shares rose 3.1% on Tuesday’s report and estimates. Rival Morgan Stanley ( MS.N ) is scheduled to report earnings on Wednesday.

“It was a noisy quarter, but we believe the exit from GreenSky was a good decision,” Keefe, Bruyette & Woods analyst David Konrad said in a note.

Goldman was the underwriter for high-profile initial public offerings (IPOs) in September, including holdings of SoftBank Group’s ( 9984.T ) chip designer arm and grocery delivery app Instacart ( CART.O ).

The share sell-off fueled hopes of a recovery in the IPO market, but a poor post-debut performance and a lackluster reception for German shoemaker Birkenstock ( BIRK.N ) have raised doubts about the strength of the market.

Goldman’s investment banking fees of $1.55 billion were largely unchanged in the third quarter after falling by a fifth in the second quarter from a year earlier.

Equity underwriting revenue rose 26% from a year earlier in the third quarter, while debt underwriting rose 27%.

Goldman saw weakness in fixed-income instruments, currencies and commodities (FICC), with net income down 6%. Other banks’ FICC results were up 6% with Bank of America and JPMorgan up 1%.

The U.S. Federal Reserve may raise interest rates one more time this year, while many bank executives expect borrowing costs to remain high over the long term.

Consumer banking weakness persists

Goldman’s ill-fated foray into consumer banking has lost $3 billion in three years.

The bank wrote down $506 million in GreenSky, which facilitates home improvement loans to customers, and sold it to a consortium of investment firms led by Sixth Street Partners.

It was bought for $1.7 billion last year, although the deal was valued at $2.2 billion in 2021 when it was first announced. Goldman took a $504 million charge on GreenSky in the second quarter.

Real estate investments were another drag on earnings as the bank booked a $358 million impairment charge, compared with $485 million in the second quarter.

That weighed on revenue from its property and wealth management division, which fell 20% to $3.23 billion.

“Going forward, Goldman Sachs will likely face less headwinds from severance costs, CRE defaults and consumer credit outflows,” said David Fanger, senior vice president at Moody’s Investors Service, a ratings firm.

Commercial real estate loans, which have emerged as a risk for banks as interest rates rise, account for 14% of Goldman’s total loan portfolio.

Salomon has shifted the firm’s focus to its traditional strengths of investment banking and trading, and aims to grow in asset and wealth management.

Investment banking results were mixed for peers, with JPMorgan Chase ( JPM.N ) reporting a 6% decline in revenue, while Citigroup ( CN ) said fees rose 34%. Morgan Stanley ( MS.N ) is scheduled to report earnings on Wednesday.

“(Goldman) is more focused toward an advanced investment banking environment than its peers,” Moody’s Fanger said.

Goldman had 45,900 at the end of September, up 3% from a quarter ago, but down nearly 7% from a year earlier. The bank has laid off thousands of employees this year, including a round in January of its biggest cuts since the 2008 financial crisis.

“We think the work we’ve done to right-size the company puts us in a position to make more selective investments in our portfolio now,” Chief Financial Officer Denise Coleman told analysts.

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