What Investors Didn’t Like in Goldman Sachs’ Earnings Report?

Shares of Goldman Sachs (GS) tumbled 7% after the investment bank said higher salaries and declining trading revenue led to fourth quarter profit that was below estimates.

The company reported earnings of $10.81 a share, missing forecasts by almost $1 a share. Revenue rose 8% to a record $12.64 billion, better than expected. Investment banking revenues also hit a record $3.8 billion. However, revenue from its trading operations declined 7%, while analysts had anticipated a small gain.

Over the last 12 months, the company generated record net revenues of $59.34 billion, record net income of $21.64 billion and record diluted earnings per share of $59.45, significantly outperforming all previous records. In addition, the ROE of 23.0% was the highest since 2007.

Investment banking generated record net revenues of $14.88 billion, driven by record net revenues in each of financial advisory, equity underwriting, and debt underwriting. Global Markets posted net revenue of $22.08 billion, the highest annualized net income in 12 years, reflecting strong positions in both equities, fixed income, FX and commodities. Stocks generated the second-highest net income, while fixed income, currency and commodities posted record-breaking net gains. Asset Management generated a record net income of $14.92 billion, including a record-high net income from equity investments and the second-highest net income from debt and debt investments. The Consumer & Wealth Management division generated record net revenues of $7.47 billion, reflecting record net revenues in both asset management and customer service.

However, a substantial drag on the bank’s performance were the rising costs. Goldman explained operating expenses jumped to $7.27 billion, 23% greater than in 2020, and 10% more than in the previous quarter, because of significantly higher compensation and benefits costs. It said the increase was because of “strong performance” and “wage inflation”.

GS shares slumped almost 7% on the day of the publication, because investors weren’t convinced about the temporary nature of the profits compression. Additional concern is a rather heavy debt load: GS’s debt to equity ratio is around 12.5. However, investment multiples look reasonable: with P/E of around 6, and P/BV in the area of 1.2, GS remains a fairly good bet on the banking sector as a whole.