A trading and investment banking boom swept Goldman Sachs to record fourth-quarter revenues, helping the Wall Street bank to more than double its profits and endorsing management’s year-old strategic plan to lift returns.
Goldman on Tuesday posted net income of $4.5bn for the final three months of 2020, up 135 per cent year on year. Revenue rose 18 per cent to $11.7bn, the highest ever for a fourth quarter. Earnings per share, at $12.08, were well above the $7.06 expected by analysts in a Bloomberg poll, in a results season where the other big banks, such as JPMorgan Chase, also beat expectations but by smaller margins.
Shares in Goldman were down almost 1 per cent in early trading, at $298.86.
The US bank’s mix of business lines positioned it to be a major beneficiary of a trading and investment banking bonanza in the fourth quarter, as volatility and central bank support amid the coronavirus pandemic drove revenues in its markets division.
Meanwhile, a flurry of stock market listings, and a rebound in mergers and acquisitions in the second half of the year, heralded big paydays for advisers in its investment banking division.
“It was an exceptionally strong quarter,” said Chris Kotowski, analyst at Oppenheimer.
Goldman recorded a 40 per cent increase in equities trading revenues, the second biggest reported by a Wall Street bank so far, behind only Citigroup. Fixed income trading revenues rose 6 per cent, behind JPMorgan and in line with Citi.
Bank of America, which also reported earnings on Tuesday, suffered a 5 per cent fall in fixed income revenues but it increased its equities and investment banking revenues by 30 per cent and 26 per cent, respectively.
“I think as long as equity markets stay robust, we could see significant [capital markets] activity in 2021 with respect to new issuance in equity, as interest rates change and we grind out of this pandemic,” said BofA chief financial officer Paul Donofrio. “You’re going to see a lot of activity in fixed income [too].”
Goldman’s comparisons with 2019 are flattered by a sharp fall in litigation charges, which took a $1bn chunk out of fourth-quarter earnings a year ago, as the bank set aside money to deal with the 1MDB money laundering and bribery scandal. The quarter also benefited from $1.8bn of gains on equity investments Goldman holds in its asset management division.
On Tuesday the US bank reaffirmed its strategic plan, which was unveiled a year ago by chief executive David Solomon and pivots the bank from its roots in trading and investment banking towards areas such as cash management and digital consumer banking.
Goldman recorded a return on equity of 22.5 per cent in the third quarter. Mr Solomon has pledged a medium-term return on equity target of 14 per cent as part of the strategic plan. The bank said it had already delivered half of the $1.3bn of cost savings it targeted over three years.
Marty Mosby, an analyst at Vining Spark, said Goldman was “moving along the path” it outlined a year ago and would not be detracted from that “just because they have this shot in the arm from markets revenues that goes away as quickly as it comes in”.
Glenn Schorr, analyst at Evercore ISI, said Goldman had made progress in creating “a more durable earnings stream with higher returns by growing and strengthening existing businesses, diversifying their products and services and operating more efficiently”.
Despite a full-year revenue increase of 22 per cent, Goldman increased compensation by only 8 per cent.
Revenues in consumer banking rose 17 per cent year on year, to $1.6bn, as Goldman expanded its loan book to $8bn and deposits to $97bn. The retail operation is still relatively small, accounting for less than 15 per cent of total revenues.
Its size means that Goldman did not benefit from the multibillion-dollar release of loan loss reserves that lifted Citigroup and JPMorgan Chase in the quarter. Goldman booked provision charges of $293m for the quarter, as the prospect of higher loan losses on its credit cards more than offset lower reserves on its wholesale loans.
Its lack of a retail bank also means Goldman is less impacted by fears about net interest margins and muted demand for loans, which led to a fall in Bank of America’s shares even as it reported a 12 per cent increase in net income for the fourth quarter.