Goldman Sachs’s Wall Street Businesses Gain Steam, Sending Profit Up 45%
Goldman Sachs reported sharply higher third-quarter earnings, a sign that lower interest rates, a stable economy and the bank’s work refocusing on Wall Street are paying off.
Profit at Goldman rose 45% to $2.99 billion. That amounted to $8.40 per share, which was better than expected. Revenue rose 7% to $12.7 billion.
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Shares pared early gains and were down about 0.7% in Tuesday morning trading.
Goldman has been undergoing a strategy shift, exiting consumer-lending after incurring billions of dollars in losses. The bank is instead refocusing on its core businesses of dealmaking and trading while growing its asset and wealth-management division.
The Federal Reserve’s recent interest-rate cut is seen as a positive for dealmaking, helping awaken Wall Street from a long malaise caused by high interest rates. But volumes aren’t at levels seen in 2021, when easy monetary policy led to a bumper year of mergers and capital markets activity.
The dynamics started to turn in banks favor earlier this year, and most analysts now expect that investment banks’ profits should rise. Lower rates can help motivate companies that have been on the sidelines to strike deals that previously seemed too expensive. That is especially the case for private-equity firms, which have historically accounted for a significant share of M&A.
In addition, a growing view that the U.S. economy may be experiencing a soft landing as inflation cools is increasing confidence among chief executives and company boards to pursue deals.
Goldman’s investment banking revenue was $1.87 billion, up 20% from a year ago, led by big increases in debt and equity underwriting revenue. This marks the third consecutive quarter of year-over-year growth in investment banking fees following two years of mostly declines.
Goldman wasn’t alone in posting big gains for dealmakers. JPMorgan Chase reported Friday its investment banking revenue jumped 31% from a year earlier to $2.27 billion. On Tuesday, Bank of America said its investment banking fees went up 15% to $1.44 billion while Citigroup’s rose 44% to $999 million.
Several macro trends, including improving CEO confidence and lower interest rates, are providing a tailwind for Goldman, a company executive said, adding that the firm’s deals backlog increased in the third quarter.
Global M&A volume was roughly $909 billion in the third quarter, up from $744.6 billion a year prior and still way below $1.57 trillion in the third quarter of 2021, according to Dealogic.
Goldman’s trading revenue of $6.46 billion was up from $6.35 billion, helped by an increase in equities and lending to institutional clients. The bank has been pushing into this type of lending to produce more predictable revenue streams.
Goldman’s earnings also got a lift from the bank’s increasing focus on gaining a greater share of its clients’ business and creating a stickier relationship with them. One area of the firm where this is playing out is in lending to institutional clients.
Goldman has been pushing into this type of lending in its trading arm in search of more predictable revenue. Its so-called FICC financing group reported record revenue of $949 million in the third quarter, up 30% from a year prior.
Revenue in asset and wealth management, a key division that Goldman is relying on to diversify its results, increased 16% to $3.75 billion. The business mostly manages investments for large institutional clients and very wealthy individuals.
Management and other fees from asset and wealth management increased 9% from a year earlier to a record $2.62 billion.
As part of its yearslong overhaul of this division, Goldman has been focused on generating a steady stream of fees off managing client investments and money. Goldman wants those fees to help offset lulls in investment banking and trading.
Goldman continues to face several headwinds. The bank is incurring steep losses as it exits its failed foray into consumer lending. Goldman is ending its credit-card partnership with General Motors, which is moving its business to Barclays, a deal the companies announced on Monday.
Goldman CEO David Solomon last month said the bank expected to incur a roughly $400 million pretax hit from the sale of the GM credit-card business and a smaller, unrelated business. On Tuesday, Goldman disclosed a $415 million pretax hit in the quarter from its consumer-lending business.
The talks hit a hurdle between the price Barclays was willing to pay for the balances and the price Goldman was willing to accept, largely due to the high charge-off rates on the GM credit cards that Goldman has issued, the Journal previously reported.
The last major remaining piece of Goldman’s consumer-lending business is its Apple partnership, where credit-card balances total around $17 billion. Goldman could be facing a bigger loss when it sells this credit-card program to a new issuer than the GM deal.
Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com