Goldman Sachs Is a Mess. Why It’s Time to Buy the Stock.

Banks have staged a remarkable comeback since they were left for dead in May after the collapse of Silicon Valley Bank and other financial institutions. And earnings so far show why. Despite overhangs from higher interest rates and customers shifting money to accounts with better yields, stocks like

Zions Bancorp

(ticker: ZION),

KeyCorp

(KEY),

Citizens Financial

Group (CFG), and

Comerica

(CMA) produced double-digit gains after reporting results that mostly matched expectations and showed that they had moved on from the issues that plagued regional banks this spring. The

SPDR S&P Bank
exchange-traded fund (KBE), for its part, has risen 7% this past week.

Goldman Sachs (GS) seems like an unlikely candidate to join the bank rally. It did everything in its power short of buying advertising space in Times Square to ensure that everyone knew how bad the quarter would be, and yet still reported earnings that fell short of analyst estimates. Goldman took a $504 million write-down on its consumer business, which includes GreenSky, a lending platform it purchased for $1.73 billion in 2021. It noted that investment banking fees—often a sweet spot—were down 20% and net interest income fell 2% year over year. The final tally? Goldman reported a profit of $3.08 a share, below forecasts for $3.16.

Still, Goldman stock has gained 7.8% for the week, and there could be more where that came from. “[It was a] clean-up quarter,” writes Wells Fargo analyst Mike Mayo. “Pain now, gain later.”

Start with net interest margin, a measure of the difference between interest earned on assets and paid on deposits. All banks are feeling the squeeze as short-term rates rise, forcing them to offer higher yields to keep customer cash in place.

Wells Fargo

(WFC) saw its NIM fall 0.11 percentage point, while

U.S. Bancorp
’s
(USB) declined 0.2 point. Goldman, which derives nearly two-thirds of its revenue from investment banking and trading, is less sensitive to swings in interest rates.

Goldman is also less exposed to the new regulations that are coming following the debacle in the sector earlier this year. Earlier this month, Michael Barr, the Federal Reserve’s vice chair for supervision, unveiled proposed rules that would require banks with assets in excess of $100 billion to hold more capital in an effort to increase stability in the financial system. Insiders worry that such rules would reduce competitiveness in the industry and impede banks’ ability to make new loans.

Goldman, for its part, said it is equipped to adapt to the rule, but that it is focused on deploying capital. The bank announced a $30 billion buyback program in February, and after passing the Fed’s annual stress test last month, the amount of additional capital Goldman has to hold, known as the stress capital buffer, is set to decrease by 80 basis points to 5.5% in October. (A basis point is 1/100th of a percentage point.) This allowed the bank to raise its quarterly dividend by 10%, giving it a yield of 3%.

The biggest reason for optimism, though, is a potential rebound in deal-making. M&A has cratered this year—amounting to a 46% decline in advisory revenue at Goldman—amid concerns about the economy and the Biden administration’s seeming eagerness to block every major deal. But with markets rallying and the Federal Trade Commission losing in court, a rebound in capital-markets activity alone could propel the stock, despite the other lingering issues.

“We believe the rest of this year will continue to have impairments and elevated expenses,” writes Keefe, Bruyette & Woods analyst David Konrad. “However, we believe it sets up for a stronger 2024 with improving capital markets pipelines, a reset consumer platform, and lower exposure to equity investments.”

What’s more, Goldman’s stock trades at 1.1 times book value, which has historically been a good entry point for the stock. Konrad sees shares hitting $400 apiece, implying a 13% upside from recent trading levels. Analysts surveyed by FactSet see the stock climbing 9% to $382.26.

Even beleaguered CEO David Solomon, who has had to contend with an onslaught of media reports that hint at discontent among the bank’s partnership ranks, sounded optimistic. “It definitely feels better over the course of the last six to eight weeks than it felt earlier in the year,” he said on Goldman’s earnings call. “I think the inflation data has been better. The client sentiment is better, and now we’ll have to watch and see that journey.”

It’s one investors should be able to profit from.

Write to Carleton English at [email protected]