By Steve Gelsi
Goldman Sachs Group Inc. on Tuesday warned inflation could impact client activity in 2022 as it reported a 13% drop in fourth-quarter profit and missed Wall Street’s profit estimates.
Shares of Goldman Sachs /zigman2/quotes/209237603/composite GS +3.20% ended a rough day of trading with a loss of just under 7%, paring earlier drops of as much as 8.8%, as the selloff weighed heavily on the Dow Jones Industrial Average DJIA .
It’s the biggest one-day percentage drop since the stock fell 8.7% on June 26, 2020, according to FactSet data.
CEO David Solomon warned about risks in the economy tied to inflation on a call with analysts.
“It makes sense that coming out of the recent period of easy monetary policy, inflation may be above-trend for some time, and in the near-term, inflationary pressures may continue to intensify before they start to decrease,” Solomon said.
“I also believe that we could see more volatility as these easing policies are unwound, which will likely have an impact on economic growth, asset prices, and client activity,” he said.
While the bank’s latest results included plenty of bright spots such as its investment banking business, Goldman said revenue at its global markets and asset management units shrank from year-ago levels.
CFRA analyst Kenneth Leon said Goldman’s higher compensation expenses and bad debt provision expenses contributed to its earnings miss. He reiterated a strong buy rating on the stock, but trimmed his 12-month price target by $30 to $440 a share.
Goldman Sachs shares have slumped 13.8% over the past three months, but have gained 18.5% over the past 12 months, while the Dow has advanced 15.1% over the past year.
The bank ran into some of the same headwinds as JPMorgan Chase & Co. /zigman2/quotes/205971034/composite JPM +6.19% and Jefferies Co. /zigman2/quotes/206157580/composite JEF +3.04% , as the impact of the omicron variant of the coronavirus that causes COVID-19 on the economy sent Treasury yields sharply lower during the quarter.
Goldman’s fourth-quarter net earnings of $3.81 billion, or $10.81 a share, fell short of the Wall Street estimate of $11.77 a share in a FactSet survey of analysts. In the year-ago quarter, Goldman reported earnings of $4.36 billion or $12.08 a share.
Total revenue increased 8% to $12.64 billion, ahead of the consensus analyst estimate of $12.04 billion.
Broken out, the firm’s investment banking revenue increased to $3.6 billion, ahead of the FactSet target of $3.24 billion and above the year-ago tally of $2.72 billion.
Net revenue in global markets fell 7% to $3.99 billion. The figure included an 11% drop in equities trading revenue to $2.12 billion.
Asset management revenue dropped 10% to $2.89 billion amid lower revenue in equity investments and lending and debt investments, offset by a boost in incentive fees.
Revenue at consumer and wealth management climbed 19% to $1.97 billion.
Provision for credit losses rose to $344 million from $293 million.
Operating expenses rose 23% to $7.27 billion, as compensation and benefits expenses jumped 31%, and as technology costs also increased.
Head count rose to 43,900 as of Dec. 31, up from 43,000 as of Sept. 30, and up 8.4% from 40,500 a year ago.
Addressing compensation costs, CEO Solomon said the corporate sector continues to experience real wage inflation across sectors.
“Coming out of last year after we went through the compensation process, there were definitely places where I think with hindsight and with the constantly-evolving environment of COVID and supply chain changes, the monetary and fiscal policy environment, what they did to savings rates, et cetera, where there was a real base pressure on what I call base kind of compensation and wage levels,” Solomon said. For full-year 2021 results, Goldman said it set records in revenue ($59.34 billion), net earnings ($21.64 billion) and earnings per share of $59.45. Its return on average common shareholder equity was 23%, the highest since 2007.