By Peter Bergman (MoneyAmped.com)
Goldman Sachs’ second-quarter profit surged, surpassing analysts’ expectations, driven by robust performance in debt financing and fixed-income trades. However, the profit growth was slightly lower compared to the exceptional first quarter, which recorded the highest earnings since 2021.
The strength of the nation’s economy has assured corporate executives that they can engage in acquisitions, debt sales, and stock offerings.
“We are in a strong position to capitalize on the ongoing increase in activity,” stated Goldman CEO David Solomon, who opened a conference call with analysts by expressing his strong disapproval of the murder plan on Donald Trump, the former president of the United States.
Although there has been some progress in financial markets and mergers, according to Solomon, the level of activity is still lower than it has been in the past.
The shares experienced a notable increase, reaching a new all-time high of 2.3%, but later reduced their gains to a modest 0.3% during late morning trading.
According to Stephen Biggar, a researcher at Argus Research, the slight increase can be attributed to the fact that the bank’s gains in investment banking did not match those of its competitors, such as JPMorgan Chase (NYSE:JPM) and Citigroup.
Profits surged to $3.04 billion, or $8.62 per share, for the four months ended June 30, surpassing analysts’ average prediction of $8.34 per share by approximately 3%, as reported by LSEG.
According to Kenneth Leon, an analysis head at CFRA Research with a positive outlook on the stock, Goldman is well-positioned to experience a boost in revenue from its banking fees due to the notable surge in its backlog.
The results surpassed expectations by smaller margins compared to the previous two quarters, during which Goldman reported profits that were 35% and 56% above estimates.
Goldman Sachs saw a significant increase in its investment banking fees, which surged by 21% to reach a total of 1.73 billion dollars in the previous quarter. Advisory fees for acquisitions and mergers (M&A) saw a solid 7% increase, while there was a significant 39% rise in debt underwriting and a notable 25% growth in stock underwriting.
On Friday, JPMorgan announced a significant 46% increase in its investment banking revenue, while Citigroup experienced an even more impressive surge of 60%.
Stay Centered on Wall St
Goldman Sachs’ second-quarter earnings last year were also negatively impacted by write-offs associated with GreenSky, a financial technology company that Goldman recently divested.
Following an unsuccessful venture into consumer banking, Goldman Sachs has shifted its focus back to its core areas of expertise – financial services and trading. This year commemorates the 25-year milestone of Goldman’s first offering to the public, coinciding with Solomon’s entrance into the company.
Investors have shown strong support for Goldman’s efforts to redirect its focus toward its Wall Street operations, resulting in a significant increase of 24.4% in the company’s stock value this year. In contrast, Morgan Stanley’s percentage stands at 11.6%, while JPMorgan’s is significantly higher at 20.5%.
Goldman Sachs experienced a notable increase in revenue from fixed income, currency, and commodities (FICC) trading, with a significant boost coming from FICC financing. This involves providing financing to equity investors and other major market players.
Revenue from FICC financing increased 37% to $850 million, which is only slightly lower than the previous record of $852 million achieved in the first quarter. This growth was primarily fueled by loan performance and organized lending.
Since 2021, Goldman has dramatically increased its provision of short-term financing to wealthy individuals as part of a strategic initiative.
Revenue from trading equities, including revenue generated from financing activities, increased 7%. The firm’s investment and wealth management division, responsible for overseeing funds for affluent individuals and institutional clients, announced a 27% increase in revenue for the second quarter.
The bank manages a staggering $2.93 trillion worth of assets. In May, it entered into an agreement to oversee UPS’s investment portfolio, which amounts to a substantial $43.4 billion. UPS is a leading company in the parcel delivery industry.
The revenue of platform solutions, the division that encompasses a portion of Goldman’s customer operations, increased by 2%.
The bank’s allocation for credit losses amounted to $282 million in the second quarter, which is a significant decrease from the $615 million recorded in the same period last year.
Denis Coleman, Goldman’s Chief Financial Officer, informed analysts that the bank intends to “scale back” its stock repurchases. In the second quarter, the bank repurchased its stock worth $3.5 billion.
According to Solomon, the bank is currently engaged in discussions with regulators regarding its recent performance in the Federal Reserve’s yearly health assessment.
The outcome of a bank’s performance in the “stress test” determines the magnitude of its stress capital buffer, which is an additional reserve of capital that the Fed mandates banks maintain to withstand an unreal recession. Goldman Sachs experienced a significant surge in stress capital buffers, with an impressive increase of 94 basis points.
“The rise in the stress money buffer from one year to the next does not appear to accurately represent the strategic growth of our firm or the ongoing efforts we have made to decrease the intensity of our stress losses,” Solomon stated.
Payment Cards
Goldman Sachs incurred a $58 million expense in the second quarter due to its plans to withdraw from the General Motors (NYSE:GM) payment card business. Last year, Goldman decided to sell off its portfolio of GM card loans.
According to those familiar with the matter, there have been discussions about replacing Goldman with Barclays at GM, as reported by Reuters in April.
A potential collaboration with tech behemoth Apple (NASDAQ:AAPL) is currently in a state of uncertainty.
Goldman’s consumer strategy included using credit cards; however, due to significant losses, the decision was made to withdraw from retail banking.
During its yearly stress test, the Federal Reserve highlighted that credit cards could pose challenges for banks. Goldman’s credit card loans experienced significant losses, ranking among the most severe in the Federal Reserve’s hypothetical scenario.
However, Goldman increased the dividend for the previous quarter to $3 per share, up from $2.75 previously.
