On Tuesday morning, former Wall Street champ Goldman Sachs (GS) reported the firm's second quarter financial results. Expectations were low. Goldman had warned the investing public that the second quarter would include large write-downs and that annualized return on equity would take a hit. Goldman still managed to disappoint.
For the three month period ended June 30th, Goldman Sachs posted GAAP EPS of $3.08 on revenue of $10.895B. That top line number, though reflecting an 8.2% year over year contraction, did manage to beat Wall Street. However, the earnings per share print fell more than a full dollar short of what Wall Street had in mind. These numbers pale in comparison to the EPS of $7.73 on revenue of $11.864B that Goldman was able to print for Q2 2022.
Net interest income decreased 3% to $1.684 as interest income popped for a gain of 247%, only to be seriously outdone by interest expense that grew 386%. Total operating expenses increased 12% to $8.544B, as net income attributable to common shareholders took a 61.6% hit, landing at just $1.071B. This number is the smallest quarterly profit reported by Goldman Sachs in nearly six years.
Annualized return on average common shareholders' equity (ROE) was 4.0% for the second quarter, dragging ROE down to 7.8% for the first half. Annualized return on average tangible common shareholders' equity (ROTE) was 4.4%, dragging ROTE for the first half down to 8.5%. Book value per share is now up 1.9% year to date at $309.33.
What's obvious is that the firm is repositioning itself, moving away from consumer finance, and focusing on core businesses. These results include a $504M goodwill impairment related to GreenSky, which is a platform acquired by Goldman just last year that the firm is already trying to sell. The firm also made provisions for credit losses of $615M versus a benefit of $171M for the first quarter. On a bright note, Goldman Sachs did end the quarter with a record $2.714T in assets under supervision, up 8.8% from Q2 2022.
Sector Performance
- Global Banking & Markets generated net revenue of $7.19B (-15%). Investment banking fees were down 20% to $1.43B. FICC (fixed income, currencies & commodities) drove revenue of $2.71B (-26%), as Equities drove revenue of $2.97B (flat from a year ago).
- Asset & Wealth Management generated net revenue of $3.05B (-4%). The drop reflected significantly higher net losses ($-403M) in equity investments, significantly lower incentive fees, and significantly lower net revenue driven by debt investments.
- Platform Solutions generated net revenue of $659M (+92%). The gain reflected significantly increased average credit card balances and higher average "point of sale" loan balances.
Note: Firm-wide, loans remained flat from the first quarter at $178M, while deposits increased 6.1% to $399M over the past three months.
Thoughts
The board did approve the 10% dividend increase announced after the Fed's stress tests. This takes Goldman's quarterly dividend up $2.75 per share starting in the third quarter. That's good for a forward yield of 3.26%. The stock trades at just 12 times forward looking earnings that also trades at less than 1.1 times book. These are positives, and reasons to invest in the stock.
That said, the stock has been apparently cheap for years now. Yet the stock trades this morning lower than it did in March of 2021 and if you want to get really granular and a bit silly, at just a 35 premium to where it peaked in October of 2007. JP Morgan (JPM) is up 225% since October of 2007.
Goldman has been getting by on reputation for years. Once the "Death Star" of Wall Street, and really since the IPO of 1999 ended the firm's highly valued partnership culture, the firm has struggled to figure out just who they are. Now, it appears the firm is ready to get back to what made it elite... investment banking, advisory services and trading.
Readers might not realize just how close Goldman Sachs is to once again becoming something special. The stock has been mired in a downward sloping price channel since last November. The stock failed to break out of this channel in February, in June and again this week.
That said, GS is close. A take and hold of the upper trendline on this chart, could be where a base forms and the stock's fortunes turn. A failure to take that level and to be honest, the stock could make its fifth lower low since May.
An Interested Trader Could...
- Purchase one GS August 18th $340 call for about $5.40
and...
- Sell (write) one GS October 20th $305 put for a rough $5.10.
Net Debit: $0.30.
What this trader is doing is betting that a market that benefits from inflows throughout this earnings season benefits financials this summer. The trader subsidizes nearly all of his premium expense by selling discounted equity risk close to support that expires two months further out.
