Goldman’s Pandemic Hot Streak Continues in Third Quarter

Goldman’s quarterly profit of $3.62 billion on revenue of $10.78 billion was better than stock analysts had forecast and sharply higher from a year ago. Since then, the global economy has crashed, political chaos has set in and interest rates have dropped to near zero—all things that should dent Wall […]

Goldman’s quarterly profit of $3.62 billion on revenue of $10.78 billion was better than stock analysts had forecast and sharply higher from a year ago. Since then, the global economy has crashed, political chaos has set in and interest rates have dropped to near zero—all things that should dent Wall Street profits.

And yet the nation’s biggest banks remain profitable. Their securities-trading desks have, remotely, hummed back to life. Big corporate bankruptcies have leveled off. Depositors haven’t pulled their money.

The emergency loans they made to big companies in the spring have largely been paid back, thanks to appetite from bond investors and support from the Federal Reserve. And they have added only modestly to their reserves for expected loan losses since June.

Goldman’s giant quarter makes plain that Wall Street remains a big moneymaker. But banks’ Main Street arms have fared better than the drumbeat of gloomy economic headlines—millions unemployed, countless small businesses closed, declines in consumer spending—might suggest.

Bank of America Corp.

, which also reported earnings Wednesday, said the improving economy allowed it to release some of the money it had set aside for consumer-loan losses.

JPMorgan Chase

& Co. and

Citigroup Inc.

said most of their cardholders are paying their bills on time.

Trouble may still lie ahead if unemployment stays high and congressional gridlock continues to hold up another round of stimulus spending that is widely seen as critical to economic recovery. JPMorgan’s James Dimon on Tuesday said the country was still at risk of a double-dip recession, which could cost his bank an additional $20 billion in loan losses.

But unlike the 2008 crisis, when overleveraged banks teetered and clients pulled their cash, today’s lenders look safe for now—a sign that regulations put in place after the last crash have served their purpose. The five largest U.S. banks reported $23 billion in third-quarter profits. Their capital ratios, a closely watched measure of soundness, have all held steady or increased since the end of last year.

“The markets continue to benefit from the unprecedented monetary and fiscal support by central banks and governments globally,” Goldman’s chief executive, David Solomon, said Wednesday.

Goldman has had a notably profitable pandemic. With a smaller lending book—about $112 billion to JPMorgan’s nearly $1 trillion—it is less exposed to defaults. And it is more heavily geared toward trading, which picked up this year as investors scrambled to reset their portfolios for a prolonged period of low interest rates and heightened economic risk.

Goldman shares rose 0.2%. Shares of Bank of America and

Wells Fargo

& Co., which also reported earnings Wednesday, lost more than 5%. Those two banks depend more on consumers, and both reported big drops in quarterly profit.

Goldman’s trading revenue rose 29% from a year ago, and fees from underwriting corporate stock and bond offerings increased 60%. The bank’s own portfolio of investments rallied along with the stock market.

Those Wall Street businesses were bright spots at rivals, too. Trading rose 30% at JPMorgan and 17% at Citigroup. The outlier was Bank of America, which reported a 4% bump that executives chalked up to a weaker stomach. “Many of our competitors will, say, take more risk,” finance chief Paul Donofrio told analysts. “Clearly that can create some differences in relative performance.”

Goldman’s return on equity, a measure of how profitably it uses shareholders’ money, was its highest since 2010. And it cleared a capital requirement that it had been in danger of missing. It helped that regulators have limited banks’ dividends and stock buybacks for now, essentially trapping profits that help improve capital ratios.

The coronavirus scrambled the stage for a major pivot under way at Goldman. The moves—among them, growing its money-management arm and joining with big retailers to sell credit cards and checking accounts—are aimed at steadying the firm’s revenue and snapping its stock price out of a yearslong sideways drift.

“If we execute, I assume the stock will follow,” Mr. Solomon said Wednesday. As across Wall Street, Goldman employees are heavily paid in stock and have moaned about declining pay.

Some of those moves are likely undisturbed by a recession—and may even be aided by it, such as a plan to raise $100 billion in new private-equity funds by 2025. Investment bargains will emerge from the economic wreckage and low interest rates will drive investors toward private-equity deals that offer higher returns.

Others, though, look riskier with the economy in a funk. Goldman’s new consumer bank specializes in unsecured loans and credit cards, bills that often go unpaid in times of financial hardship and aren’t backed by collateral. That business, for now, looks fine: Revenue rose 50% from a year ago to $326 million.

One cloud still hanging over Goldman is the resolution of a yearslong investigation into its dealings with a Malaysian investment fund. Earlier this year it agreed to pay up to $3.9 billion to Malaysia’s government, and is continuing negotiations with the U.S. Justice Department over a fine that The Wall Street Journal has reported could top $2 billion.

The firm has $3.15 billion set aside to cover all its expected litigation and regulatory matters, a number it didn’t meaningfully add to in the third quarter.

Goldman, like other companies, is trying to slowly bring employees back into the office. Mr. Solomon said Wednesday that about 30% of employees are rotating through its New York headquarters in weekly shifts and that 60% of its workforce is back in its major Asian offices.

Write to Liz Hoffman at [email protected]

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