Goldman Sachs seen headed to steep earnings drop as deal-making lags

By Saeed Azhar

NEW YORK (Reuters) - Goldman Sachs appears headed to another set of weak quarterly earnings as deal-making lags and the bank retreats from a loss-making consumer business. Goldman is expected to report third-quarter earnings per share (EPS) of $5.31 when it reports results on Tuesday, according to average estimates compiled by LSEG. That would reflect a 36% decline from its EPS of $8.25 a year earlier.

Such lackluster results would follow second-quarter profits that sank to a three-year low. After a record 2021, Goldman's performance has been subdued since last year as rising interest rates, economic uncertainty and the war in Ukraine prompted companies to hold off on deal-making.

"Goldman is more beholden to the capital markets" than other banks, said Stephen Biggar, an analyst at Argus Research Corp. Investment-banking doldrums are the biggest reason for weak earnings, he added.

The company's third-quarter results will be depressed by writedowns of $300 million to $350 million on its commercial real estate assets, analysts wrote, after it set aside $485 million in the second quarter.

Provisions for losses on credit cards will also drag profits lower, analysts said.

Goldman Sachs declined to comment ahead of its earnings.

On Wednesday, the bank said it agreed to sell GreenSky, a home improvement lender, and associated loans to a consortium led by investment firm Sixth Street Partners. The transaction is set to close in the first quarter.

While it did not disclose the deal's value, Goldman will take a charge of 19 cents per share for the third quarter, adding to a previous writedown of $504 million in the second quarter.

CEO David Solomon is scaling down the company's consumer business after it lost $3 billion over three years.

The shift away from retail makes Goldman even more reliant on businesses that swing with economic cycles, Biggar said.The firm's global banking and markets unit, which houses investment banking and trading, accounted for about 66% of its revenue in the second quarter.

UBS on Wednesday cut its target price for Goldman Sachs to $382 a share from a previous target of $400. UBS still has a buy rating on the stock.

Goldman shares slipped 0.6% on Wednesday to close at about $313 a share. They have fallen almost 9% this year.

While the stock "is one of the best plays on a recovery" in investment banking, threats are mounting to such a bounce-back, UBS analyst Brennan Hawken wrote in a note.

The firm has taken a leading role in several initial public offerings this year, including for chip designer Arm Holdings, but its business advising on mergers and acquisitions (M&A) has remained weak in line with the broader industry, Biggar said.

"It's still very uncertain," Solomon told Reuters in an interview last month. "People are starting to open up to a better environment and think a little bit more forward strategically, but there's a lag time," he said, referring to M&A.

Sluggish markets prompted the firm to lay off thousands of employees in January in its biggest round of layoffs since the 2008 financial crisis.

It may cut about 400 more employees in the coming weeks as part of its annual performance review, targeting under-performers, two sources familiar with the matter said last month. The bank declined to comment at the time.

(Reporting by Saeed Azhar; Editing by Lananh Nguyen and Rod Nickel)