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Goldman Sachs Earnings: Company Incurs Impairments to Clean Up Some Investments

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The Goldman Sachs Group Inc
(GS)

Goldman Sachs GS took some impairments on its investments in the quarter, while investment banking revenue may be bottoming. The company reported net income to common shareholders of $1.07 billion, or $3.08 per diluted share, on $10.9 billion of net revenue. Net revenue declined 9% from the previous year and 11% from the previous quarter, mainly due to declines in trading and merger advisory revenue. Earnings in the quarter were depressed by multiple impairments, including about $500 million for its consumer banking platforms business and another $500 million on real estate investments. These impairments are symptomatic of the state of the economy and the cost of Goldman Sachs stretching beyond its traditional capital markets businesses, but they overall aren’t material to the company’s total market value that is over $100 billion. We don’t anticipate making a material change to our $410 fair value estimate for narrow-moat Goldman Sachs and assess shares are undervalued.

In its capital markets franchise, underwriting revenue of about $800 million was over 25% higher than a year ago and up slightly from the previous quarter, as upwardly trending equity markets increased equity underwriting. Investment banking revenues of $1.4 billion is at or below a reasonably normal level and additional confidence of a positive trajectory to the economy would lead to growth from recent levels. On the other hand, trading revenue composed of market making and commissions of about $5 billion in the quarter is the main revenue line that is still meaningfully above its pre-COVID 2019 quarterly average of about $3 billion and could further soften going forward. Our thoughts generally correlate with investment banking management teams that have mentioned that somewhere in between 2019 and 2021 levels may be reasonable for capital markets revenue.

Following the Federal Reserve’s annual bank stress testing results, Goldman Sachs increased its quarterly dividend by 10% to $2.75.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Michael Wong

Sector Director
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Michael Wong, CFA, CPA, is director of equity research, financial services, North America, for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc.

Michael previously served as chair of the valuation committee. Before assuming his current role in 2017, he was a senior equity analyst, covering investment banks and brokerages. Before joining Morningstar in 2008, he worked in corporate and public accounting.

Wong holds a bachelor’s degree in business administration, with concentrations in accounting, corporate finance, and financial services from San Francisco State University, where he graduated summa cum laude. He also holds the Chartered Financial Analyst® designation and is a Certified Public Accountant. Wong has also passed the Certified Financial Manager (CFM) and Certified Management Accountant (CMA) exams.

Wong won the “Technology Thought Leadership” award at the 2016 WealthManagement.com Industry Awards for his report, The Financial Services Observer: The U.S. Department of Labor’s Fiduciary Rule for Advisors Could Reshape the Financial Sector. In 2011, he ranked second in the Investment Services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey. Wong was awarded the summer 2005 Johnson & Johnson Institute of Management Accountants CFM Gold Medal.

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