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Earnings Show Goldman Sachs’ Problems Are Worse Than Investors Thought

James Brumley

It’s still too soon to draw sweeping conclusions about the current state of the banking industry from the earliest earnings releases. But, there is at least one semi-common thread Goldman Sachs Group (NYSE:GS) largely confirmed on Monday morning. That is, trading has been a sore spot. GS stock fell more than 3% following poor Q1 trading revenue, while rival JPMorgan Chase (NYSE:JPM) also saw sizable dips in bond and stock trading activity last quarter. Citigroup (NYSE:C)? Same story.

goldman sachs stock

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Unlike most of its peers though, Goldman’s woes weren’t limited to trading. Three of the company’s four key divisions fell short of expectations, undermining the GS stock price by nearly 3% on Monday.

Investors knew relatively new CEO David Solomon inherited something of a fixer-upper when he took the helm in October. What they may not have realized at the time was just how big the project is.

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It was once a powerhouse in the banking business, and the underwriting business in particular, but Goldman Sachs doesn’t quite turn heads the way it used to. Not only have rivals like JPMorgan and Bank of America (NYSE:BAC) stolen some of Goldman’s thunder, Goldman Sachs itself lost its edge.

When David Solomon took over as CEO late last year, he had big shoes to fill — but also a lot of work to do.

Namely, Solomon — who boasts more of a background in investment banking than trading — arguably needed to make trading a priority. That arm had been losing ground for a year.

Now it’s been lagging a year and a half. Fixed income and currency trading revenue fell 11% year-over-year, while equities trading revenue was off 24%.

Goldman Sachs Earnings Recap

Not only did trading revenue for Goldman Sachs weaken, but other parts of the company also hit headwinds. Investing and lending revenue fell 14%, to $1.84 billion. Overall institutional client service sales, which encompasses all trading, fell 18%. Investment management revenue was off 12% to $1.56 billion.

The one bright spot wasn’t even that bright. Investment banking revenue of $1.81 billion was even with year-ago levels.

Earnings still topped expectations, to be clear. Earnings of $2.18 billion, or $5.71 per share, were considerably better than the $4.89 per share of GS stock analysts were modeling. But, that bottom line was notably weaker than the year-earlier figure of $6.95, and the top line of $8.81 billion was not only well short of last year’s $10.08 billion, it missed estimates of $8.93 billion.

Overhauls take time, but this one is taking a particularly long time, and investors may not be willing to wait it out.

Case in point: Plans that were put in place in 2017, under Blankfein, to enter the consumer banking business won’t be reviewed and publicized — and turned into performance targets — until next year. That’s not good enough or fast enough, however, to suit Viola Risk Advisors analyst David Hendler, who noted, “not completing the strategic review until 2020 is ridiculous. It should be done by the next quarter.”

Hendler added, “there’s a lot of work that needs to be done at this company to reposition it for growth over the next decade.”

He’s not wrong.

Looking Ahead for GS Stock

Prior to the release of Goldman’s first quarter results, analysts were modeling full-year earnings of $23.37 per share on sales $35.7 billion, versus last year’s top line of $36.6 billion and earnings of $25.27 per share of Goldman Sachs stock. Those consensus numbers may or may not be updated in the foreseeable future.

One matter is certain enough though: even with last quarter’s big earnings beat, a big chunk of the difference was rooted in cost-cutting and accounting decisions rather than better operational efficiency and more effective marketing. Goldman’s ROE of 11.1% is better than the industry’s average, but not on par with its biggest rivals.

That will have to change before the market can turn truly excited about owning GS stock, but for that to change, revenue growth for at least two or three of its divisions has to take shape first.

It’s concerning that Goldman investors have seen so little for so long and that industry veteran Solomon is off to such a rough start.

As of this writing, James Brumley held a long position in Bank of America. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.

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