Goldman shares fall as weak trade and rising wages hit earnings

Jan 18 (Reuters) – Goldman Sachs Group (GS.N) missed its quarterly profit forecast on Tuesday as weak business activity and rising spending wiped out gains from a record M&A boom, sending shares of Wall Street’s leading investment bank down more than 8%.

Bank profits in the fourth quarter were hit by weak trading volumes as the Federal Reserve slowed the pace of its asset purchases after 18 months of injecting liquidity into capital markets to blunt the impact of the COVID-19 pandemic.

Goldman’s performance was also marred by higher special charges of $432 million, mostly related to litigation provisions and a $213 million reserve build.

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Wage inflation has also weighed on bank profits as major US lenders are forced to raise salaries for junior bankers over the past year to retain top talent.

“The most important and surprising thing is that the pay ratio went from 23.3% to 25.7% Q/Q, whereas we had estimated it at 21%, in line with the figure last year,” said Oppenheimer analyst Chris Kotowski. “This is the first time we’ve covered the stock where the ratio has increased from Q3 to Q4.”

Goldman’s operating expenses jumped 23%, primarily due to higher compensation and benefits costs. JPMorgan’s top executives last week flagged similar high spending and said the lender was willing to splurge on compensation to win the talent war against rival banks.

Meanwhile, Goldman’s business unit suffered in comparison to a year ago, when wild swings in global financial markets sent trading revenue to all-time highs.

Its earnings per share are expected to fall from $59 in 2021 to $41 in 2022, according to consensus estimates and so “it’s not like the world doesn’t understand that 2021 is a unique and probably irreplaceable year,” Kotowski said. .

Revenue from the global markets business, which houses trading business and accounts for about a third of the bank’s overall revenue, fell 7% to nearly $4 billion, due to weakness in equity trading and on fixed income securities.

Equity underwriting revenue fell 8% due to lower revenue from secondary equity offerings.

The Goldman Sachs logo is seen on the floor of the New York Stock Exchange (NYSE) in New York, New York, U.S., November 17, 2021. REUTERS/Andrew Kelly

TRADE THE PAIN

Like rivals, Goldman’s trading slowdown eclipsed a 45% rise in investment bank revenue to $3.80 billion as its top rainmakers raked in record fees advising on some of the biggest mergers , initial public offerings and agreements involving special purpose acquisition companies.

The country’s largest bank, JPMorgan Chase & Co (JPM.N), also faced a slowdown in its trading arm, which sent its shares down as much as 6% as analysts worried about its profitability forecast. future. Read more

Goldman’s net income attributable to common shareholders fell to $3.81 billion in the quarter ended Dec. 31 from $4.36 billion a year earlier.

Earnings per share fell to $10.81 from $12.08 a year earlier. Analysts on average had expected earnings of $11.76 per share, according to Refinitiv data.

Total net income rose 8% to $12.64 billion, driven by its investment banking and asset and consumer management units.

Its consumer bank, Marcus, a key part of chief executive David Solomon’s strategy, continued to build on the momentum of previous quarters.

Although the unit is much smaller than traditional Main Street lenders, it grew 8%, thanks to higher credit card and deposit balances.

Under Solomon, the bank stuck to a plan to expand its consumer lending and credit card businesses.

Since taking over the reins from Lloyd Blankfein in 2018, Solomon has sought to diversify the bank’s revenues with the aim of focusing more on predictable revenue streams such as consumer banking, consumer wealth management and cash management.

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Reporting by Noor Zainab Hussain and Niket Nishant in Bengaluru and Matt Scuffham in New York; Written by Anirban Sen; Editing by Arun Koyyur

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