Goldman Sachs misses on profit after hits from GreenSky, real estate

Goldman Sachs on Wednesday posted profit below analysts' expectations amid write-downs tied to commercial real estate and the sale of its GreenSky lending unit.

Here's what the company reported:

Second-quarter profit fell 58% to $1.22 billion, or $3.08 a share, on steep declines in trading and investment banking and losses related to GreenSky and legacy investments, which sapped about $3.95 from per share earnings. Revenue fell 8% to $10.9 billion.

The company disclosed a $504 million impairment tied to GreenSky and $485 million in real estate write-downs. Those charges flowed through its operating expenses line, which grew 12% to $8.54 billion.

Shares of the bank climbed less than 2%.

Goldman CEO David Solomon faces a tough environment for his most important businesses as a slump in investment banking and trading activity drags on. On top of that, Goldman had warned investors of write-downs on commercial real estate and impairments tied to its planned sale of fintech unit GreenSky.

Unlike more diversified rivals, Goldman gets the majority of its revenue from volatile Wall Street activities, including trading and investment banking. That can lead to outsized returns during boom times and underperformance when markets don't cooperate.

Goldman's results "reflect the limitations of a business mix that relies more heavily on investment banking and principal investments," David Fanger of Moody's Investors Service said in an e-mail. "When client activity remains weak and higher interest rates are pressuring valuations, earnings decline more than at a bank with higher recurring revenues."

Exacerbating the situation, Solomon has spent the past few quarters retrenching from his ill-fated push into consumer banking, which has triggered expenses tied to shrinking the business.

The bank put up a paltry 4.4% return on average tangible common shareholder equity in the quarter, a key performance metric. That is far below both its own target of at least 15% and competitors' results including JPMorgan Chase and Morgan Stanley, which put up returns of 25% and 12.1% respectively.

"This quarter reflects continued strategic execution of our goals," Solomon said in the earnings release. "I remain fully confident that continued execution will enable us to deliver on our through-the-cycle return targets and create significant value for shareholders."

Trading and investment banking have been weak lately because of subdued activity and IPOs amid the Federal Reserve's interest rate increases. But rival JPMorgan posted better-than-expected trading and banking results last week, saying that activity improved late in the quarter, and that raised hopes that Goldman might exceed expectations.

Fixed income trading revenue fell 26% to $2.71 billion, just under the $2.78 billion estimate of analysts surveyed by FactSet. Equities trading revenue was essentially unchanged from a year earlier at $2.97 billion, topping the $2.42 billion estimate.  

Investment banking fees fell 20% to $1.43 billion, just below the $1.49 billion estimate.

During a call with analysts Wednesday, Solomon said that while activity levels in parts of investment banking were at decade-long lows, he was beginning to see signs of life. Mergers and equity capital markets activity was stating to pick up, he said.

"It definitely feels better over the course of the last six-to-eight weeks than it felt earlier in the year," Solomon said.

Asset and wealth management revenue fell 4% to $3.05 billion as the firm booked losses in equity investments and lower incentive fees.

Analysts asked Solomon about updates to his plan to exit consumer banking. Goldman has reportedly been in discussions to offload its Apple Card business to American Express, but Solomon didn't address that possibility directly, saying only that the bank's card tie-ups were "long term partnerships."

Even after taking the quarterly hit on GreenSky, there is $625 million in intangible value remaining in that business that could be marked down in coming quarters, as well as the impact of related loan sales, the bank's CFO said during the call.

Goldman shares have dipped nearly 2% this year before Wednesday, compared with the approximately 18% decline of the KBW Bank Index.

On Friday, JPMorgan, Citigroup and Wells Fargo each posted earnings that topped analysts' expectations amid higher interest rates. Tuesday, Bank of America and Morgan Stanley also reported results that exceeded forecasts.