Goldman Sachs Faces Steep Earnings Drop as Deal-Making Slows

GS Stock

Goldman Sachs (NYSE:GS) is poised for another quarter of underwhelming earnings as deal-making activity lags and the bank continues withdrawing from a consumer business causing losses. For the third quarter, Goldman is expected to report earnings per share (EPS) of $5.31, as per average estimates compiled by LSEG. This would signify a 36% decrease from its EPS of $8.25 a year ago.

These lackluster results follow a second quarter in which profits plummeted to a three-year low. After an exceptional 2021, Goldman’s performance has been muted since last year, owing to factors like rising interest rates, economic uncertainty, and geopolitical tensions, such as the war in Ukraine, which have led companies to postpone deal-making.

Analysts believe that the investment banking segment is the main reason behind Goldman’s weak earnings, and the bank’s results for the third quarter are expected to be negatively affected by write-downs of $300 million to $350 million on its commercial real estate assets, following a set-aside of $485 million in the second quarter. Provisions for losses on credit cards are also likely to weigh down profits.

Goldman Sachs refrained from providing a comment ahead of its earnings release. Recently, the bank announced the sale of GreenSky, a home improvement lender, and related loans to a consortium led by investment firm Sixth Street Partners. This transaction is set to close in the first quarter, and Goldman will incur a charge of 19 cents per share for the third quarter, in addition to a previous write-down of $504 million in the second quarter.

CEO David Solomon is streamlining the company’s consumer business after it incurred losses amounting to $3 billion over three years. This strategic shift away from retail further emphasizes Goldman’s reliance on businesses that are influenced by economic cycles, according to analysts.

Goldman’s global banking and markets unit, which encompasses investment banking and trading, constituted about 66% of its revenue in the second quarter. UBS recently reduced its target price for Goldman Sachs to $382 per share from the previous $400 but still maintains a buy rating on the stock. Goldman shares closed at approximately $313 per share, having fallen nearly 9% in the current year.

While Goldman Sachs is considered a key player in the recovery of investment banking, UBS analyst Brennan Hawken has pointed out that potential threats to this rebound are growing. The bank has been involved in several significant initial public offerings this year, such as chip designer Arm Holdings, but its performance in mergers and acquisitions (M&A) advisory services has remained lackluster, in line with the broader industry.

CEO David Solomon acknowledged the uncertainty surrounding the M&A landscape, mentioning that while people are gradually becoming more optimistic about the environment and thinking more strategically, there’s still a lag in deal-making activity. Sluggish markets earlier this year led Goldman to carry out its most substantial round of layoffs since the 2008 financial crisis, which may be followed by further job cuts, targeting underperforming employees, as part of its annual performance review. The bank has not officially commented on this matter.

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