VOO - Bank of America And Goldman Sachs Do Well

2023-04-18 16:44:55 ET

Summary

• Bank of America Corporation posted a very strong first quarter and The Goldman Sachs Group, Inc. did not do too badly.
• Bank of America continues to show the results of quite a few years of Brian Moynihan's leadership, producing a very strong 12.5 percent return on equity.
• Bank of America does have a substantial bond portfolio that is underwater, a portfolio built as the Federal Reserve flooded markets with cash, but it seems under control.
• Goldman Sachs is still going through its efforts to restructure the company, yet it still produced an 11.6 percent return on equity.
• David Solomon is still trying to remake Goldman Sachs into an organization that produces a more stable flow of revenue than it has achieved through deal making.

Bank of America Corporation ( BAC ) turned in a 12.5 percent return on equity in the first quarter of 2023 while The Goldman Sachs Group, Inc. ( GS ) turned in an 11.6 percent return on equity.

These results compared favorably with the returns achieved by JPMorgan Chase & Co. ( JPM ), Wells Fargo & Company ( WFC ), and Citigroup Inc. ( C ).

JPMorgan Chase has produced the best result among the five giant banks reporting so far in the U.S., turning in an amazing 18.0 percent return on equity.

Wells Fargo turned in an 11.7 return on equity, while Citigroup only produced a 9.5 percent return.

Bank of America's result is up from 11.0 percent one year ago, and its return on tangible common equity came in at 17.4 percent, up from 15.5 percent one year ago. Goldman Sachs produced a 12.6 percent return on tangible common equity.

These are very good results given that it is assumed that these giant banks have a cost of capital of around 10.0 percent. Citigroup, therefore, is the only one of these five large banks that is just about breaking even.

The other designation of importance is whether or not an organization has a "competitive advantage" in the marketplace. A bank is said to have a competitive advantage in the marketplace if it has a return on equity that is 15.0 percent or more.

To earn these returns in an economy that is such a mess is truly remarkable.

JPMorgan Chase has kept its return on equity at 15.0 percent or more for quite a number of years.

This just cements the position of JPM CEO Jamie Dimon among the leaders in the American banking community.

It is remarkable that Bank of America has produced a 12.5 percent return on equity, and one must salute Brian Moynihan for the way that he has brought Bank of America bank into the ranks of the top performers among the largest banks in the country.

Some publications even rank Bank of America as the best bank in the U.S. for customers to receive digital services.

One must also note that another credit can be given to Mr. Moynihan and his team, as Bank of America has recently been included in discussions about how to get the banking system out of the difficulties experienced during the March meltdown of smaller, regional banks.

The major problem that Bank of America faces is its securities portfolio.

The earnings report for the first quarter of 2023 shows that the bank is still deeply underwater on its bonds.

"Bank of America was one of the biggest buyers of government-backed bonds when rates were super low during the height of the pandemic."

Remember, that was the time when the Federal Reserve was pumping so much money into the financial system, and Bank of America "needed a place to stow extra deposits when consumers and businesses were flush with cash and demand for loans was tepid."

Now, with the Fed's monetary tightening, many of these bonds are "underwater" and must be held to maturity in order to avoid losses.

In the first quarter of 2023, the unrealized losses in the bond portfolio of Bank of America fell by $9.5 billion. The unrealized losses were down by $17.1 billion from six months ago when interest rates were peaking.

At the end of September, these unrealized losses totaled more than $116.0 billion.

It has been noted that erasing these losses at that time would have destroyed about 43 percent of the bank's total equity.

Other than that, Bank of America appears to be moving in a very good direction. Mr. Moynihan has done a very good job during his tenure of turning Bank of America around and building it into a very profitable operation.

David Solomon, the chief executive officer at Goldman Sachs, has not had such an easy road.

Following the Great Recession, Goldman Sachs decided it had to redo its business plan.

Goldman Sachs had been the "real, super-performer" amongst the biggest banks in America, but the environment had changed.

A little bit earlier, Morgan Stanley (MS), who will produce its results later this week, changed its business model, focusing more on consumers and building up its wealth management focus to produce not only good returns but also to produce returns that were much steadier.

Morgan Stanley has done very well.

Goldman Sachs moved later and did not do so well. It has turned into a laggard. An 11.6 percent return on equity is not a bad result, but in terms of what Goldman used to do, it still is in the middle of its restructuring program.

Goldman "has been shrinking its once-grand plans to be a major lender to Main Street."

The bank stated that it took "a roughly $470 million hit to revenue after selling a part of its Marcus portfolio and transferring the rest of its personal loan portfolio to available for sale.

The bank also released money that it had set aside for potential losses on the Marcus loans.

Furthermore, deal making "plummeted" last year after a fantastic 2022.

It has not picked up this year. Equity underwriting fell 8 percent from a year ago; trading revenue fell 13 percent from a year ago.

Goldman is not quick "together" yet, but it is still 11.6 percent on equity.

Revenues from asset and wealth management were up 24 percent from one year ago.

To Goldman Sachs owners, however, this is a "down" performance. They were once used to better results.

Mr. Solomon hopes to be back up there in another year or two.

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