Three reasons why Goldman Sachs ended the year with a bang

Shares of Goldman Sachs Group (NYSE:GS) were moving higher Tuesday after the white shoe investment bank posted excellent fourth quarter earnings that topped analysts’ estimates.

Revenue jumped 7% year-over-year in the fourth quarter to $11.3 billion, while net earnings were up 51% to $2 billion, or $5.48 per share, in the quarter. Both of these totals easily outpaced consensus estimates.

For the full year, revenue was $46.3 billion, down 2% year-over-year, while net earnings came in at $8.5 billion, down 24% year-over-year, due to 11% higher expenses.

The firm ended an overall so-so year with a bang and there were three primary reasons why it finished strong – and why its momentum could continue this year.

Asset management numbers surge

Several years ago, with the launch of its digital bank, Marcus, in 2016, and the acquisition of GreenSky, a fintech platform that facilitates loans for banks and merchants, Goldman Sachs sought to make a push into consumer banking. The strategy was to broaden its revenue stream to better compete with other large financial services companies. But last year, Goldman Sachs made the strategic decision to wind down this initiative as it was not generating adequate profit and proved to be a drag on earnings. So, in early 2023 it stopped offering loans on Marcus and in October of last year it sold off GreenSky.

Instead, the firm decided to simplify its structure and its focus and concentrate on its strengths – investment banking and asset and wealth management. In the fourth quarter, the asset and wealth management division was the primary revenue generator as it produced $4.4 billion in revenue, up 36% from the previous quarter and 23% year-over-year. Revenue was buoyed by higher management fees, which were up on rising asset totals.

Equity trading revenue pops

Within its global banking and markets business, Goldman Sachs’ equity trading arm, which is its platform for institutional trading, posted net revenue of $2.6 billion, up 26% from the fourth quarter of 2022. Equities intermediation led the way with $1.5 billion in revenue in the quarter, up 35% year-over-year, while equities financing did $1.1 billion in revenue, up 15%. The spike in equities intermediation reflected higher net revenues in derivatives, while equities financing got a boost from higher net revenue from prime financing for hedge funds and large institutional clients. The equities trading revenue offset a 24% year-over-year revenue decline in fixed income currency and commodities (FICC) trading to $2 billion.

For the full year. Goldman Sachs had a record year for equities financing revenue at $11.5 billion, up 5% from 2022. In general, when equity markets are performing well, like they did in the fourth quarter, and all of 2023 for that matter, equities trading revenue tends to rise.

Investment banking poised for growth

Goldman Sach’s bread-and-butter is investment banking, as it finished number one in both the volume and value of deals in 2023. This is the seventh consecutive year it has led in deal-making, according to Bloomberg. Yet, this was a terrible year for M&A overall, as the volume of deals was down 14% overall in 2023, while the value of deals was off 41% — and that’s down from 2022, which was also not a good year.

As a result, investment banking fees were down 12% year-over-year to $1.7 billion in the fourth quarter, but they were up 6% from the third quarter of 2023. For the full year, however, investment banking fees were off 16% compared to 2022 to $6.2 billion.

But there are some bright spots on the horizon for investment banking. Goldman Sachs saw its backlog of investment banking fees increase in the fourth quarter compared to the previous quarter, and 2024 is expected to be a better year for M&A, as inflation is expected to trend lower and interest rates are anticipated to start coming down.

“We are already seeing signs of a potential resurgence in strategic activity, which is reflected in our backlog” Chairman and CEO David Solomon said on the Q4 earnings call.

So, while Goldman Sachs has streamlined and is refocusing its business, it has the advantage of being the market leader in both investment banking and institutional trading. It also has a robust asset and wealth management business that the company is focused on making more durable by growing its private banking business for high-net-worth individuals and its alternative investment arm.

Its legacy and brand were built on these two businesses, and the narrowing of its strategic focus should help them thrive. With a reasonably low valuation, Goldman Sachs is a good position for growth in 2024.