Q2 2024 Earnings Summary
- Goldman Sachs anticipates a significant increase in M&A activity, which is expected to drive revenues and positive operating leverage due to their solid backlog and leading market position.
- Strong growth in financing revenues, particularly in FICC financing up 37% year-over-year, indicates durable and growing revenue streams. The firm sees continued opportunity for growth in these areas, driven by client demand and market conditions.
- Goldman Sachs maintains a strong competitive position in investment banking and markets, with leading market share in M&A and capital raising. They are confident in their ability to continue investing and strengthening their franchise despite the competitive landscape.
- Slowing Growth in Consumer Revenues Due to Underwriting Adjustments: The firm's consumer platform fees decreased sequentially due to the absence of the GreenSky contribution. Although there is growth across the card portfolio, the level of growth has slowed as the firm has implemented several rounds of underwriting adjustments to card originations, leading to expectations of more muted period-over-period growth.
- Return on Equity (ROE) Below Target Amid Operational Challenges: Despite highlighting revenue growth and record performances in certain areas, the firm reported an ROE of 11%, which is below the 15% target. Management acknowledged a disconnect due to ongoing drag from enterprise platforms, and noted that the Asset & Wealth Management (AWM) ROE is still around 10%, indicating challenges in achieving desired return levels.
- Regulatory Capital Constraints Limiting Capital Management Flexibility: The firm is facing higher-than-expected regulatory capital requirements resulting from stress test processes that are opaque and lack transparency, contributing to excess volatility in capital requirements and making prudent capital management difficult. Management expressed concerns that the results do not reflect significant business changes, potentially impacting the firm's ability to manage capital effectively.
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M&A Outlook and Sponsor Activity
Q: Is private equity M&A activity nearing an inflection point?
A: Management sees momentum picking up in sponsor-led M&A but notes that activity levels are still significantly below 10-year averages, needing another 10–20% increase to reach those levels. They expect a reacceleration of sponsor activity over the next few quarters into 2025, bolstered by their strong position in leveraged finance and private credit platforms. -
Capital Requirements Impact
Q: Does the SCB increase affect financing business and capital plans?
A: The firm maintains ample capital, operating with a 90 basis point cushion above requirements, and doesn't foresee changes to the financing business. They may moderate share repurchases but have flexibility to support clients and return capital to shareholders. Management is engaging with regulators to address the opaque stress test process, aiming to reduce future capital requirements. -
Return on Equity Below Target
Q: Why aren't returns meeting the 15% ROE target?
A: ROE was 11% in Q2 and 12.8% for the first half, affected by residual drag from enterprise platforms and below-average investment banking activity. Management anticipates improved returns as they wind down non-core operations and investment banking normalizes. Enhancing the Asset & Wealth Management (AWM) segment, currently at a 10% ROE, is key to achieving targets. -
Financing Revenue Growth and Rate Sensitivity
Q: How sustainable is financing revenue amid potential rate cuts?
A: Record financing revenue reflects disciplined growth and strong client relationships across diversified sub-asset classes. Management believes they can continue to grow despite varying rate environments, focusing on attractive risk-adjusted returns. -
Asset & Wealth Management Progress, Alts Business
Q: What's the outlook for the alternatives business in AWM?
A: The firm has surpassed fundraising targets, expecting to exceed $50 billion this year and grow total alternatives AUM beyond $300 billion. With $3.8 billion in unrealized incentive fees, they anticipate significant future contributions as assets are harvested. Scaling across asset classes like equity, credit, real estate, and infrastructure is expected to improve margins beyond the current 23%. -
Expense Management and Efficiency Ratio
Q: Will revenue growth improve the efficiency ratio?
A: Year-to-date efficiency ratio improved to 63.8%, nearly 10 points better year-over-year, but still above the 60% target. Management expects further improvement with revenue growth and cost reductions, including moving out of certain exposures. Positive operating leverage is anticipated if performance aligns with expectations.