2024-01-16 13:25:32 ET
Summary
- Goldman Sachs reported strong financial performance in Q4, reaching full-year net earnings of $8.5 billion and earnings per share of $22.87.
- The company is focusing on its core businesses, Global Banking & Markets and Asset & Wealth Management, and diversifying and strengthening revenue streams.
- Analysts are optimistic about the company's growth plans, with expected earnings per share growth of 52% this year and sustainable recovery similar to post-2015.
Introduction
For the first time since 2017, I started to cover The Goldman Sachs Group, Inc. ( GS ) again on October 4, 2023.
Back then, I wrote an article titled " Goldman Sachs: Down 25%, Yielding Near 4%, Why I'm Still Avoiding The Stock."
Since then, the stock is up 25%, beating the already juicy 12% return of the S&P 500 (SP500) by a considerable margin.
The company's impressive gains were supported by the market's decision to price in no less than six rate cuts in 2024. As we can see below, the market expects rates to drop to the 3.75% to 4.00% range at the end of this year.
As a result, investors jumped into some of the world's biggest financial institutions, which included Goldman Sachs stock, as well as private equity and investment banking.
With that said, in my prior article, I discussed how Goldman Sachs, despite being categorized as a bank, differentiates itself as an investment bank with limited exposure to traditional lending and borrowing.
In my analysis, I pointed out that a significant portion of its revenues came from Global Banking & Markets (69%) and Asset & Wealth Management (28%).
Even more important than these numbers is that the bank was actively working on reducing its historical principal investment portfolio and focusing on risk management, especially regarding its commercial real estate exposure.
During the Barclays Global Financial Services Conference, Goldman Sachs reiterated its edge in investment banking and wealth management.
The company anticipated a more favorable environment in 2024, emphasizing ongoing efforts to streamline operations and drive progress despite challenges faced in the past year.
Hence, in this article, we'll use its just-released Q4 2023 numbers and comments to assess the risk/reward for investors in light of its recent stock price rally and efforts to streamline the bank.
So, let's get to it!
What's Up With Goldman Sachs?
Let's start at the top with some dry numbers.
Thankfully for the company and its shareholders, the financial performance in the fourth quarter was strong, allowing the company to reach full-year net earnings of $8.5 billion and earnings per share of $22.87.
Unfortunately, strategic decisions and FDIC special assessment fees impact the full-year net earnings, reducing them by $2.8 billion, earnings per share by $8.04, and the return on equity ("ROE") by 2.6 percentage points.
Within the Global Banking & Markets segment, there were both positive and challenging aspects.
Despite an 8% decline in revenues to $30 billion for the year, the company maintained its top league table position in announced and completed M&A.
Investment banking fees for the fourth quarter experienced a 12% decline, primarily driven by a reduction in advisory revenues compared to a strong quarter in 2022.
The company's backlog, however, increased quarter-on-quarter, supported by a significant rise in advisory.
In the FICC & Equities segment, FICC net revenues for the quarter were $2 billion, down 24% from the previous year due to lower activity in rates and other macro products.
On the positive side, FICC financing revenues reached a record $739 million.
Equities net revenues showed a notable increase of 26%, increasing to $2.6 billion, driven by improved results in derivatives.
Financing revenues for FICC & Equities collectively rose 10% in 2023, aligning with the strategic priority to grow client financing.
Furthermore, Asset & Wealth Management reported revenues of $13.9 billion for 2023, marking a 4% year-over-year increase.
Despite a decline in equity investment revenues and incentive fees, there was growth in more durable revenues, including record management and other fees, as well as record private banking and lending revenues.
Management and other fees for Q4 reached $2.4 billion, reflecting a 9% YoY increase.
The Alternatives segment, which is one of my favorites, also demonstrated a strong performance, with alternative assets under supervision totaling $295 billion at the end of the fourth quarter.
Management and other fees for the quarter amounted to $571 million in the fourth quarter, contributing to a yearly total of $2.1 billion, surpassing the $2 billion target for 2024.
Gross third-party fundraising stood at $32 billion for the quarter and $72 billion for the year.
Platform Solutions reported full-year revenues of $2.4 billion, indicating a substantial 58% increase compared to 2022.
Quarterly net revenues in Q4 reached $577 million, reflecting a 12% YoY increase.
However, an agreement with General Motors regarding the credit card program had an impact, leading to loans being held for sale and releasing associated loan loss reserves of approximately $160 million.
This decision was initially reported on in November .
Moving over to loans, net interest income for the firm was $1.3 billion in Q4, showing a 13% decline relative to the third quarter. The total loan portfolio at quarter-end was $183 billion, reflecting a modest increase.
Provisions for credit losses amounted to $577 million, driven by net charge-offs and seasonal balance growth.
Also, needless to say, capital management remained a key focus, with the common equity Tier 1 ratio at 14.5% at the end of Q4, 150 basis points above the current capital requirement of 13%.
As a result, the company returned $1.9 billion to shareholders in the fourth quarter through common stock repurchases and dividends.
Moreover, despite ongoing uncertainty around the Basel "Endgame" rule , during its earnings call, the company expressed a commitment to remaining nimble with respect to capital return, prioritizing supporting client deployment opportunities, sustainable dividend growth, and returning excess to shareholders through buybacks, particularly when valuation levels are attractive.
The company's dividend currently yields 2.9%.
Based on this context and without discussing anything else, there needs to be more than elevated rates and economic uncertainties to break Goldman Sachs.
Goldman Is Focusing On Growth
As I discussed in my last article, the bank has undergone a transformation to capture more growth while navigating challenges.
For example, during its earnings call, the company made clear that it strategically focused on its two core businesses - Global Banking & Markets and Asset & Wealth Management.
These segments form the backbone of the firm's operations, allowing it to leverage its leadership positions in investment banking, capital markets, equities, and fixed income.
By divesting non-core businesses and streamlining operations, the company aims to enhance its efficiency and concentrate on areas where it has a proven right to win.
On top of that, a key aspect of the strategic turnaround is the emphasis on diversifying and strengthening revenue streams.
The company has witnessed significant progress in reducing historical principal investments, achieving solid investment performance, and consistently growing more durable revenue bases such as management and other fees, private banking, and lending revenues.
Furthermore, the exit from the market's lending business, the aforementioned sale of the Personal Financial Management business, and the strategic decisions related to GreenSky and the credit card program underscore the company's commitment to aligning its operations with emerging market trends.
Looking at the bigger picture, the company obviously wants to grow bigger on an international scale.
During its earnings call, it noted that the Global Banking & Markets segment, with its top-ranked investment bank, strong merger franchise, and leadership in equities and fixed income, places the bank in a unique position to capitalize on international financial opportunities.
With regard to economic headwinds, despite facing headwinds such as regional bank failures (in early 2023), geopolitical tensions, and a significant tightening of financial conditions, Goldman Sachs expresses optimism for the future during its earnings call.
To support its thesis, the bank highlighted the resilience of the U.S. economy and anticipates a potential soft landing with the renewal of optimism for rate cuts in the first half of the year.
Essentially, this is the economic base case. Given that leading indicators like the Empire State Manufacturing Index just made a new multi-year low, I am not so sure we will see a soft landing.
Furthermore, according to the company, signs of a resurgence in strategic activity and a robust backlog indicate its ability to navigate challenges and seize opportunities in a dynamic economic environment.
This brings me to the valuation.
GS Stock Valuation
When it comes to that bank's valuation, it is fair to say that analysts are buying the company's growth plans.
Using the data in the chart below:
- Goldman Sachs is expected to grow its earnings per share by 52% this year.
- 2024 is expected to see 14% growth, followed by 18% expected growth in 2025.
- While these numbers are subject to change, they indicate a sustainable recovery, similar to what we saw after 2015.
- Going back to 2002, GS has traded at a normalized P/E ratio of 12.1x, which has guided its stock price very well, as we can see below (the blue line).
- If the company continues to follow this valuation (it currently trades at a blended P/E ratio of 16.5x), it could return 16.7% per year through 2026.
Since 2002, GS shares have returned 9.1% per year, which is a good number given the selloff during the Great Financial Crisis and the long time it took to recover from that.
Takeaway
With all of this in mind, I like Goldman Sachs a lot. I continue to believe that management is taking the right steps to maintain elevated long-term growth and avoid some of the usual headwinds in "traditional" banking.
However, I cannot make the case that GS will return 16% per year going forward.
Although I wouldn't even short the stock with my enemy's money, a lot of success in the industry relies on the Fed achieving a soft landing. When adding that so much good news has been priced in during recent weeks, I continue to give Goldman Sachs stock a Hold rating.
If we get 10% to 15% stock price weakness, I will turn Bullish and maybe even consider buying GS for a family account that lacks financial exposure with a decent yield.
For further details see:
Breaking Down Goldman Sachs' Q4 Triumph: What Investors Need To Know