Analyst Note| Michael Wong |
Goldman Sachs reported weak fourth-quarter results for 2022, as net revenue continued its downward trend and expenses remained high. The company reported net income to common shareholders of $1.19 billion, or $3.32 per diluted share, on $10.6 billion of net revenue for the fourth quarter of 2022. Net revenue fell 16% from the previous year with the majority of the decline from investment banking that fell 48% to $1.9 billion and other principal transactions revenue that fell 80% to $369 million. Sequentially, net revenue declined 12% and operating expenses grew 5%, which led to net income falling 60%. The sequential growth in expenses was somewhat surprising, as the third quarter already reflected expenses from recent acquisitions, trading expenses were high while trading revenue was low, management should have been preparing the company for a tougher environment, and historically the company’s compensation ratio in the fourth quarter is low while in 2022 it was the highest compensation ratio quarter. The annualized return on tangible common equity in the fourth quarter was 4.8% compared with the prior nine months of 2022 ROTE of 12.2%. Despite the disappointing fourth-quarter results, 2022 was still the company’s second highest year for net revenue and earnings per share due to acquisitions and lingering benefits from the stimulative monetary and fiscal policies of the previous couple years. As our long-term outlook for narrow-moat Goldman Sachs remains largely the same, we don’t plan on making a material change to our $404 fair value estimate for the firm and assess shares are modestly undervalued.