By Liz Hoffman 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (April 16, 2020).

Goldman Sachs Group Inc.'s profit fell 46% in the first quarter, a three-month stretch when the coronavirus pandemic battered markets, companies and investors hoarded cash and the U.S. economy ground to a halt.

An $868 million loss in its own investment portfolio, plus money it set aside to cover expected loan losses in the future, dragged down otherwise strong results in its core businesses of trading and investment banking.

The Wall Street firm reported a quarterly profit of $1.21 billion, or $3.11 a share, down from $2.25 billion a year ago. Revenue of $8.74 billion was basically flat from the first quarter of 2019.

"We were on a good roll through January and February," said Chief Financial Officer Stephen Scherr. "Then came March."

The results met muted expectations from stock analysts and held up slightly better than rivals JPMorgan Chase & Co. and Wells Fargo & Co., which both reported steep declines in quarterly profits on Tuesday. Goldman shares bucked the trend on an otherwise dreary day in stocks, rising 0.2% after being down as much as 5% in early trading.

The first three months of 2020 presented banks their most daunting challenges in more than a decade, with interest rates falling near zero and the global economy in free fall. Companies tapped their credit lines -- $144 billion in a single week in March alone, according to Morgan Stanley analysts -- an unprofitable and anxiety-producing development for their lenders. Nearly 17 million Americans have sought unemployment benefits in the past three weeks.

JPMorgan, the largest U.S. bank, posted a 69% decline in quarterly profit. Wells Fargo reported an 89% drop. Bank of America Corp. and Citigroup Inc., which reported their results alongside Goldman on Wednesday, had similar declines of nearly 50%.

Still, most of the pain for banks is yet to come. As a proxy for the economy, bank results tend to be lagging indicators of trouble. Nearly one-third of U.S. renters didn't make their April monthly payments, a move that will take a few weeks to ricochet through the mortgage market. Credit-card balances are likely to go unpaid, too.

JPMorgan and Wells Fargo socked away more than $10 billion between them to cover expected loan losses. Goldman -- a smaller firm whose roots are in Wall Street investment banking, not Main Street commercial banking -- set aside $937 million, nearly as much as the $1.07 billion it set aside in all of 2019. Mr. Scherr said corporate clients drew down about $19 billion in loans in the quarter.

Its investment portfolio -- the equities and debt securities it holds -- took an $868 million loss. Investors have long questioned that segment, criticizing it as opaque and unpredictable, and Goldman proved unable to avoid the bloodshed in markets, which swung wildly during the quarter.

Mr. Scherr said revenue gains of about $1 billion on some real-estate investments and the sales of private-equity companies, including a U.K. student-housing company and an Australian data business, were zeroed out down by $1 billion in losses, including a $180 million hit on shares Goldman owns of Avantor Inc., a listed health-care company.

For all of Goldman's changes in recent years, which include an embrace of consumer lending and money management, the firm still leans heavily on its traders and investment bankers.

That can cut both ways in wild markets like in early 2020, providing opportunities they don't get in calm times but also exposing them to risks that are hard to manage. (JPMorgan posted a 32% rise in trading revenue, but also took $900 million in quarterly losses on derivatives it held on its books.)

Goldman's trading revenue rose 28% to $5.16 billion. Its fixed-income traders, who deal in everything from bonds to commodities to interest-rate products, had their best quarter in five years. Groups that help clients wager and manage volatility in asset prices flourished, too.

Goldman has been easing up on the big bets that once drove its trading profits, lowering the risk and size of its securities inventory. That proved lucky as the pandemic hit, Mr. Scherr said, leaving Goldman freer to jump into the market.

Revenue from mergers fell 11%, though that is less a reflection of the economic outlook because bankers collect their fees only when deals are completed, typically months after they are struck. Revenue from stock and bond offerings rose 29%.

Goldman's $1.3 trillion money-management arm reported losses in its debt and equity investments as both stock prices and bond yields plummeted.

All eyes are on Goldman's nascent consumer bank, Marcus, where it makes small personal loans and offers online savings accounts. When Goldman launched the business in 2016 -- in what already appeared to be the late innings of a heady run in consumer confidence -- it told investors it was focused on "through-the-cycle" profits, corporate-speak for looking past any downturn that would result in early losses.

Goldman had $4.7 billion in outstanding consumer loans as of Dec. 31, and another $13.7 billion in credit lines made available to, but undrawn by, holders of its Apple Inc. co-branded credit card. Mr. Scherr said that between 10% and 20% of its borrowers, across both products, took the firm up on its pre-existing offer to skip a monthly payment, a figure he expects to rise.

Mr. Scherr said the firm would likely tighten up its lending standards. "We're still open and originating [new loans], but I have every expectation we will originate less," he said.

Write to Liz Hoffman at liz.hoffman@wsj.com

 

(END) Dow Jones Newswires

April 16, 2020 02:47 ET (06:47 GMT)

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