Goldman profit tops estimates as dealmaking cushions hit from GreenSky, real estate

By Saeed Azhar and Niket Nishant

NEW YORK (Reuters) - Goldman Sachs' third-quarter profit dropped less than expected as a nascent recovery in dealmaking offset an $864 million writedown related to its GreenSky fintech business and real estate investments.

Wall Street executives are more hopeful of a recovery in capital markets activities after dealmaking came to a near halt in 2022 in the wake of increased geopolitical risk following the war in Ukraine and the Federal Reserve's aggressive monetary tightening.

Goldman Sachs' Chief Executive David Solomon said he expects continued recovery in both capital markets and strategic activity such as mergers and acquisitions.

"The work we're doing now provides us a much stronger platform for 2024," he said.

Goldman Sachs' net profit slumped 33% to $2.06 billion, or $5.47 per share, it said on Tuesday. Analysts on average had expected a profit of $5.31 per share, according to LSEG data.

Shares of the bank were down 0.2% in late morning trade, while shares of Bank of America, which also reported on Tuesday and beat estimates, were up 3.1%. Rival Morgan Stanley is set to report its earnings on Wednesday.

"It was a noisy quarter, but we believe exiting GreenSky was a good decision," said David Konrad, analyst at Keefe, Bruyette & Woods in a note.

Goldman was an underwriter for high-profile initial public offerings (IPOs) in September, including SoftBank Group's chip designer Arm Holdings and grocery delivery app Instacart.

The share sales sparked optimism about a recovery in the IPO market, but poor performance after debuts, and the lukewarm reception to German sandal maker Birkenstock, have raised doubts about the strength of the market.

Goldman's investment banking fees of $1.55 billion were largely unchanged in the third quarter after declining by a fifth in the second quarter from a year earlier.

Equity underwriting revenue in the third-quarter jumped 26% from a year earlier, while debt underwriting climbed 27%.

Goldman saw weakness in fixed income instruments, currencies, and commodities (FICC), with net revenue down 6%. FICC results from other banks were mixed with Bank of America up 6% and JPMorgan up 1%.

The U.S. Federal Reserve may raise interest rates one more time this year, while several bank executives have said they expected borrowing costs to stay higher for longer.

CONSUMER BANKING WEAKNESS LINGERS

Goldman's ill-fated foray into consumer banking, which has lost $3 billion over three years, continued to weigh.

The bank took a $506 million writedown on GreenSky, which facilitates home improvement loans for consumers and was sold to a consortium of investment firms led by Sixth Street Partners.

It was bought for $1.7 billion last year although it was valued at $2.2 billion when the deal was first announced in 2021. Goldman took a charge of $504 million on GreenSky in the second quarter.

Real estate investments were another drag on earnings as the bank booked an impairment charge of $358 million compared with $485 million in the second quarter.

That weighed on revenue from its asset and wealth management unit, which slipped 20% to $3.23 billion.

"Going forward, Goldman Sachs will likely face less headwinds from severance costs, CRE impairments and consumer loan exits," said David Fanger, a senior vice president at rating agency Moody's Investors Service.

Commercial real estate loans, which have emerged as a risk for banks as interest rates rise, accounted for 14% of Goldman's total loan portfolio.

Solomon has shifted the firm's focus back to its traditional strengths - investment banking and trading - and aims to grow in asset and wealth management.

Investment banking results have been mixed for peers, with JPMorgan Chase reporting a 6% decline in revenue, while Citigroup said fees jumped 34%. Morgan Stanley is set to report its earnings on Wednesday.

"(Goldman) remains highly geared toward and more reliant on an improved investment banking environment than its peers," said Moody's Fanger.

Goldman had a headcount of 45,900 as of September end, up 3% from a quarter ago, but down nearly 7% from the year-ago period. The bank has laid off thousands of employees this year, including a round of cuts in January that was its largest since the 2008 financial crisis.

"We think that the work we've done to right-size the firm is something that puts us in a position to now make more selective investments in our headcount," chief financial officer Denis Coleman told analysts on a call.

(Reporting by Niket Nishant and Noor Zainab Hussain in Bengaluru and Saeed Azhar in New York; Editing by Megan Davies, Lananh Nguyen, Arun Koyyur and Nick Zieminski)