GS Goldman Sachs Group Inc

By Liz Hoffman 

Nobody is better at capitalizing on chaos than Goldman Sachs Group Inc.

Its traders and investment bankers posted near-record revenue to keep firmwide profits steady, throwing an elbow to larger commercial-bank rivals that blamed the coronavirus pandemic for lower quarterly results.

Goldman was buoyed by its Wall Street roots, seizing on a flood of corporate fundraising deals and torrid trading markets to post its second-highest quarterly revenue ever, at $13.3 billion. Those fees were slightly offset by higher reserves for future loan defaults in what is expected to be a sustained and deep recession.

The challenge now for Chief Executive David Solomon: not to learn the wrong lesson. Goldman hasn't seen this kind of activity since 2010. Its ability then to wring profits from economic turmoil bolstered its mythical status as a Wall Street heavyweight and delayed its push into steadier businesses such as consumer banking and asset management that could help balance the firm when this crisis passes.

"We became super busy because our clients were super busy," Mr. Solomon said on a conference call. "I don't necessarily view that as permanent." He added that market activity has slowed in the past few weeks from the spring pace.

Quarterly earnings were roughly flat from a year ago at $2.4 billion. Per share, that amounted to $6.26. That far outpaced expectations of Wall Street analysts, who had expected Goldman to earn $1.12 billion, or $3.90 a share. Shares rose 1.5% in morning trading and briefly touched a five-month high.

The second quarter was banks' biggest test in more than a decade. Unemployment soared, companies lined up for cash and executives spun up models to see how their businesses would fare in what is likely to be a deep, and possibly sustained, downturn. Goldman's good fortune underscores a broader divide that people have struggled to reconcile in recent months, between a stumbling economy and a rallying stock market.

Quarterly profits fell 51% at JPMorgan Chase & Co. and 73% at Citigroup Inc. Wells Fargo & Co. posted its first quarterly loss in 12 years. The three banks set aside a combined $28 billion in the quarter to cover expected losses on loans to newly unemployed consumers and corporate borrowers whose businesses have evaporated. Goldman, a smaller lender, set aside $1.6 billion.

The current economic crisis isn't a 2008-style banking-system meltdown, and today's banks hold more blow-cushioning capital than they did then. But that capital isn't bottomless, and a sustained recession would eat into it as loans go bad. Last month, the Federal Reserve ordered banks to continue a hiatus on share buybacks and capped their shareholder dividends to preserve cash.

Goldman is considered to be in a better position than larger commercial banks to weather at least this leg of the crisis. Without a big mortgage or credit-card business, it is less exposed to a spike in unemployment or ultralow interest rates.

Net interest from loans contributed just 12% of Goldman's revenue last year, versus half or more at JPMorgan and Bank of America Corp. Nearly two-thirds of its revenue comes from securities trading and investment banking.

Trading revenue nearly doubled from a year ago. Volatile markets are Goldman's specialty, and a playground the firm hasn't seen in nearly a decade. Revenue was 149% higher than the same period last year in fixed-income trading, a more opaque business where better risk models and sharper noses make a difference during a chaotic market.

Goldman's investment bankers had one of their best quarters ever as companies rushed to sell stock and debt to the public to shore up their finances. Goldman helped raise cash for Ford Motor Co., cruise line Carnival Corp. and United Airlines Holdings Inc., each racing to survive the shutdown. Investment-banking revenue of $2.66 billion was 36% higher than the same period last year, as underwriting revenues from those deals and others offset a drop in merger fees.

While the chaos of the quarter helped Goldman's core Wall Street businesses, it now threatens the firm's new consumer-lending arm, Marcus, which launched about three years ago and had $23 billion of outstanding or available loans as of March 31.

All are unsecured loans, which are often the first bills to go unpaid as struggling borrowers prioritize their home, car and other collateral from repossession.

Goldman says Marcus is built for the long haul. But its belated push onto Main Street means it missed the consumer-banking boom that its rivals enjoyed over the past decade and now faces only the potential bust.

About one-quarter of the $4.4 billion Goldman has set aside to cover expected loan losses are for consumer loans, which represent less than 10% of its total loans, suggesting it expects those to default at a higher rate than corporate or real-estate loans.

Goldman's balance sheet grew to a postcrisis high of $1.1 trillion as of June 30, with an influx of cash and higher trading inventory offsetting a decline in loans. Corporate clients borrowed heavily early in the quarter, but replaced that bank debt with longer-term bonds after the Fed intervened and markets relaxed.

It plowed excess cash into safe harbors such as Treasury bonds that offer paltry returns but boost financial resilience. One measure that tracks assets the bank could easily sell in a pinch has risen 22% over the past two quarters, a faster pace than overall assets. "The organization sleeps better at night knowing we have it," Chief Financial Officer Stephen Scherr said in an interview.

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

(END) Dow Jones Newswires

July 15, 2020 12:31 ET (16:31 GMT)

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