Goldman Sachs defied the coronavirus crisis to earn as much in the second quarter of 2020 as it did a year earlier after a bonanza in bond trading offset a surge in loan loss provisions and another round of legal charges.
The Wall Street bank, which has been criticised for its continued commitment to fixed income trading since the financial crisis, reported net income of $2.42bn for the year, unchanged from a year earlier.
Earnings per share for the most recent period were $6.26, far better than the $3.78 predicted by analysts, as the bank benefited from a 150 per cent surge in fixed income trading revenues in the second quarter. The same boom allowed JPMorgan Chase to almost double its fixed income revenues in the second quarter and drove a 68 per cent rise at Citigroup.
“The turbulence we have seen in recent months only reinforces our commitment to the strategy we outlined earlier this year to investors,” said David Solomon, chief executive. In January, Mr Solomon detailed a plan to boost Goldman’s returns by expanding into new areas such as cash management while maintaining its big trading operation.
The fixed income performance from April to June was that division’s best quarterly haul in nine years, delivering revenues of $4.24bn compared with $1.7bn the year before. Goldman said the bumper quarter reflected “continued strong client activity in intermediation and financing”.
Investors have been rapidly repositioning their portfolios to try to keep pace with the wild market swings caused by uncertainty around the coronavirus’ economic impact, and shifts in interest rates, including the Federal Reserves cuts in March.
The bumper second quarter result brings the bank close to meeting additional capital demands from the Fed, which wants to the bank to have a common equity tier 1 (CET1) ratio of 13.7 per cent by October. Goldman’s CET1 ratio was 13.6 per cent at the end of June, implying it has $13.60 of high quality capital for every $100 of risk-weighted assets.
“[The] primary metrics we are watching for is continued growth in tangible book value, ability to sustain dividends, and aggressive coverage of potential losses,” said Marty Mosby, analyst at Vining Sparks. “This quarter’s earnings strength, coupled with aggressive reserve builds, checks all three boxes.”
Goldman’s equities division put in its best quarterly performance in 11 years, increasing revenues by 46 per cent year-on-year to $2.94bn. Equity markets were also characterised by extreme volatility in the quarter, rising and falling on news of vaccines and outbreaks, as well as surprises in economic indicators such as unemployment.
JPMorgan Chase boss Jamie Dimon warned on Tuesday that trading revenues could halve later in the year if markets returned to normal.
Goldman’s investment banking revenues were up 36 per cent year on year, as the bank benefited from record fee levels across the industry.
The strong performance from those core businesses helped Goldman to record second quarter net revenues across the group of $13.3bn.
Goldman’s return on tangible equity was 11.8 per cent for the quarter, almost double the 6 per cent return on tangible equity in the first quarter and within striking distance of the 14 per cent returns Goldman has promised by 2022.
Provisions for loan losses came in at $1.59bn, versus $937m in the first quarter, when the Covid-19 crisis began to bite. Goldman said the increase was “primarily” linked to provisions against loans in its corporate book, because of “continued pressure in the energy sector” and the economic fallout from the pandemic.
Still, Goldman’s consumer and wealth management division, which includes its online bank Marcus and its Apple credit card, swung to a $131m loss, after taking $317m of provisions for credit losses.
The litigation charge of $945m was well above the $66m taken in the second quarter of 2019. Most of the charge relates to continuing cases around the 1MDB multibillion dollar bribery and money-laundering scandal, a person familiar with the situation said. Goldman remains in protracted negotiations with the Department of Justice about a potential settlement over the fraud, which one of its former partners has already pleaded guilty to participating in.
“These [litigation charges] will no doubt be necessary to settle the 1MDB and other matters but still is an unusually large amount,” Chris Kotowski, analyst at Oppenheimer wrote in a note to clients, where he described the quarter as a “blowout’ for Goldman.
Shares in the bank rose almost 5 per cent in pre-market trading.