On Tuesday Goldman Sachs missed earnings expectations for the first time since David Solomon took over a year ago. For its chief executive, the underperformance had the added edge of coming months before the bank's long-awaited investor day in January, increasing the pressure on his team to show a pathway to better returns.
Mr Solomon's response was to appeal for patience on profitability, pledging that investments in projects such as Goldman's online bank Marcus, its Apple credit card and a transaction banking platform would pan out - despite collectively costing the Wall Street bank a net $450m this year.
"We are willing to sacrifice some short-term returns to make these investments better position and strengthen the franchise and allow us to better deliver for our clients in the long run," Mr Solomon said.
In the third quarter, Goldman's earnings of $4.79 per share were worse than the $4.86 expected by analysts in a Bloomberg survey - even though estimates had been pared back by more than 15 per cent in the four weeks before results day. Net income fell 27 per cent.
[They] are investing in the rollout of their consumer bank which should help generate higher returns in 2020
Marty Mosby, investment analyst at Vining Sparks
Goldman lost $80m on its proprietary investment in WeWork and another $267m on its public equity holdings, chiefly Uber, Tradeweb and Avantor. Investment banking fees fell 15 per cent year-on-year, in a quarter when rivals JPMorgan Chase and Citigroup posted rises of 8 per cent and 4 per cent, respectively.
Shares in Goldman Sachs dropped more than 3 per cent in morning trading, a fall that Sandler O'Neill analyst Jeffrey Harte said partly reflected "pretty weak" advisory revenues and higher credit losses, as well as the news that Goldman had bought back fewer shares than expected in the quarter.
On an 11am call with analysts, Goldman calmed fears about the stock repurchases by explaining that the programme had been halted because of negotiations with the US Department of Justice over its role in the 1MDB bribery scandal, and that the repurchases had resumed.
Goldman shares closed up 0.3 per cent at $206.46, on a day when the KBW bank index gained 1.83 per cent.
Mr Solomon struck an optimistic tone by describing August's Apple card debut as "the most successful credit card launch ever". He said the first billing cycle had gone well, but provided no details on customer numbers or financial metrics. At online bank Marcus, Goldman said it now had $55bn of deposits, which are lowering its funding costs, and a $5bn loan book where provisions for loan losses are "flat".
The transaction banking platform, meanwhile, has handled $250bn worth of payments and is "on schedule to bring very consequential corporate clients of the firm on to that platform", chief financial officer Stephen Scherr told investors.
Marty Mosby, a veteran analyst at Vining Sparks, said the growth initiatives gave him comfort about the bank's future, noting that several one-off factors hit earnings during the third quarter.
"[They] are investing in the rollout of their consumer bank which should help generate higher returns in 2020," he said. He added that the impact of investment reversals - such as in Uber - "should subside soon".
Although the 15 per cent hit to Goldman's core investment banking revenues came in for attention as worse than analysts had expected, one company insider argued that Goldman had a monster third quarter in 2018 and that Goldman remains the biggest fee earner in global M&A deals and equity capital raises, as well as the number two earner in high yield debt issuance.
Goldman remains committed to its 2017 target of adding at least $5bn of revenue within three years and has promised a new three-year plan in January. Mr Solomon, who has overhauled the way Goldman publishes financial information, said the bank would also be clearer about its progress going forward.
"I understand . . . the demand that you have that we need to lay out some clear objectives and better metrics in more transparency," he told Wall Street analysts. "I think we're on our way to doing that."
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