Following the footsteps of other financial service giants, Goldman Sachs (NYSE: GS) reported its first-quarter 2020 earnings on Wednesday. As expected, the banking firm’s earnings missed the market’s expectations, while revenue surpassed the targets. Peers JPMorgan Chase (JPM) and Wells Fargo (WFC) reported their disappointing quarterly results on Tuesday, and Citigroup (C) and Bank of America (BAC) joined Goldman Sachs with their bleak results on Wednesday.
Let’s look at what Goldman Sachs management discussed on the recently ended quarter’s performance and outlook at a time when the devastating health crisis has created an uncertain economy.
Like all other financial sector companies, the first quarter proved to be two different operating periods for Goldman Sachs, with a solid performance in January and February, followed by a challenging and volatile backdrop in March.
Financial markets business performed well in both January and February as markets reached new highs, driven by client confidence and activity. However, in early March, financial markets began to start experiencing severe risks from the spread of COVID-19 across the globe. There was a spike in volatility across most financial assets and global markets.
For the quarter, Goldman Sachs ranked Number 2 globally in equity underwriting, with $12 billion in volume across 80 transactions. The company executed a number of key IPOs during the first two months of the quarter. Following the market pullback, Goldman Sachs helped a number of clients raise capital in the convertible market through public and private transactions.
For the first three months of 2020, the company accelerated deposit growth in the digital consumer banking business. In asset management, equity and debt investments experienced material mark to market losses from falling asset prices. The firm also recognized higher credit losses and bolstered its reserves.
During the quarter, Goldman Sachs returned $2.4 billion of capital to shareholders through share repurchases, notably at the beginning of the quarter and common stock dividends. On March 16, Goldman Sachs temporarily suspended buybacks through the second quarter of 2020. The management believes that it can maintain the dividend.
Looking forward, our economists expect a very significant near-term decline in growth followed by a rebound in the second half of the year when they expect us to get back about 50% of the decline in output that we lose in the first two quarters. More specifically, annualized US GDP is forecasted to decline in excess of 30% in the second quarter before recovering in the third and fourth quarters, resulting in an economic contraction of about 6% of the year.
Goldman Sachs, which gets its most of the revenue from trading and advisory businesses, witnessed little new M&A activity over the past few weeks. During the time of low confidence, the company expects this dull scenario to continue over time and the revenue accrual on the M&A side to slow down until reaching the higher confidence period.
For anybody operating a business, you have to be planning on an assumption that we’re going to be operating in a recession through 2020 into 2021 and you have to plan accordingly. Will the monetary policy and fiscal policy be a benefit to the positive of what that trajectory looks like in the third, fourth quarter and into the first half of next year? Yes, but it’s very hard to quantify what that will be because the uncertainty around the course that the virus will take and how it will affect human behavior is still very uncertain. – David Solomon, CEO
When an analyst asked about the provisions in the case of delay in economic recovery, CFO Stephen Scherr said that if the recovery happens in 2021 instead of the second half of 2020, the management would expect provisions and losses to reflect the downside. It’s worth noting that the company’s provision for credit losses in the first quarter was $937 million, an increase of $600 million from the last quarter.
GS stock, which rose 3% today, had plunged 27% from its 52-week high ($250.86) it notched three months ago.
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