As banks post their first quarter reports, Barclays Senior Equity Analyst Jason Goldberg joins Market Domination to share his call on Goldman Sachs' (GS) first quarter report — its "cleanest in a while."
Goldberg explains that Goldman Sachs' improvements come as the company has "narrowed its ambitions" in the consumer space. Between 2001 and 2002, Goldberg says, the firm built out a mass-market consumer franchise with lending and wealth management units. Goldman Sachs spent the last year "downsizing," Goldberg adds, having sold off its GreenSky consumer lending platform and its personal financial management unit.
In its first quarter report, Goldman Sachs no longer had "nagging charges" and had the opportunity to "reshift" its balance sheets and build capital, Golberg says. The company also benefitted from a pickup in investment banking activity in the first quarter of 2024, "albeit still below historical levels, but much improved," Goldberg adds.
Goldberg adds that it's "hard to fault management" for attempting growth strategies on the consumer end. He credits the company's leadership for "cutting its losses" and returning the franchise to its core strengths: investment banking and trading.
They posted pretty impressive trading results, particularly relative to what we saw last week out of JPMorgan and Citigroup, and we didn't have these kind of nagging charges that weighed on results most of last year. So here's a company that put up, you know, mid-teens ROTCE after putting up kind of a single-digit ROTCE last year. So off to a good start.
JULIE HYMAN: So this is a very different story than the narrative around Goldman Sachs last year, right? To your point, the numbers were different, but also the sort of vibe David Solomon was sort of getting a lot of criticism. Execution-wise, what has changed at Goldman? I mean, some of what you're talking about is just lapping bad comps, but what have they really done that you think has been the pivot here in getting to this better performance?
JASON GOLDBERG: You know, certainly, I think in 2001-2002 they spent a lot of time, energy, and money kind of building out, you know, a mass market type consumer franchise both lending and even wealth management and spent much of last year kind of downsizing that. So downsizing what they're doing in the credit card space, selling off their green sky unsecured consumer lending platform, selling off their personal financial management unit that they acquired not that long ago.
And, you know, to do that, they certainly took on some charges and costs associated with that. And finally, as you start to see the results this year, you don't have the drag from those businesses and just the cost to exit those businesses weighing on the results. And on top of that, you did see a strong trading quarter. And, you know, finally, after really two years of subdued investment banking activity, you know, signs of life in both underwriting and M&A.
JOSH LIPTON: And Jason, I'm just curious to get your take on the job you think CEO David Solomon has done here. I mean, to Julie's point, last year was rough. He caught a lot of heat-- criticism for the consumer business. You know, the firm's so well. Jason, what grade would you give him?
JASON GOLDBERG: You know, listen. I think they took a chance on the consumer strategy. It didn't work. They quickly pivoted away from that. So it's hard to sometimes fault management for trying strategies to grow. I think sometimes companies don't try to find enough ways to grow. I'll give them, you know-- It didn't work and I'll give them credit for quickly pivoting, cutting their losses, acknowledging, you know, they tried to do too much too quickly, and kind of refocusing the franchise back to the core strengths in terms of investment banking and trading.
And now with kind of a renewed emphasis of merging their [INAUDIBLE] management businesses together, you're starting to see the fruits of that labor come together, and you're seeing a pickup in both, you know, record assets under supervision this quarter as well as reducing the capital intensity of that business.
JULIE HYMAN: Jason, I want to broaden out, if we could, and talk about the other banks that we've heard from thus far. Because I am not a TikTok user, but clearly, you're more up on your TikTok trends than I because you wrote your latest note reacting to the bank earnings, sort of a riff on no Chick-fil-A sauce. I get, which I guess is a thing, you know, the disappointment that investors felt in not getting that in net interest income forecast increase from a lot of the big banks. Why do you think they didn't get it? And do you think that the banks are going to kind of muddle along as a result?
JASON GOLDBERG: You know, certainly, that was a theme on Friday I think with JPMorgan, Wells Fargo in particular, and also Citi not increasing their net interest income guidance, something that investors were looking for. State Street did. Get fast forward to today, M&T actually did. And we still have a lot more banks to come out this week. I think it's just a lot of it's just driven by banks taking some, you know, cautious approach. Loan growth is off to a slow start this year. That tends to be a big driver of net interest income.
And while deposit trends year-to-date have been good, you know, I think there's just some uncertainty, particularly given at one point we thought that Fed was going to cut six times this year. Now the market's thinking two to three times, and ultimately how deposits behave against this kind of changing backdrop. I think it gives management a little bit of pause for not wanting to increase their net interest income guidance after, you know, them kind of having to lower guidance throughout the course of last year, just given some of the issues that banks had around deposit pricing.
JOSH LIPTON: And Jason, Morgan Stanley reports tomorrow. You're a fan overweight the name. What do you expect to hear?
JASON GOLDBERG: You know, certainly, I think you'll see, like you saw some other banks, pretty strong results in investment banking fees. They should have a pretty strong quarter there, you know, much more strength in fixed income underwriting, less of an increase in equity underwriting, and maybe a further decline in advisory. Although, we do think pipelines are good there.
You know, they should have a sound result in trading. You know, they're more geared to equities. You know, equities is kind of running up year over year despite the fact that [INAUDIBLE] comps a year ago. And, you know, both their wealth management, investment banking businesses should benefit from the market lift. And I think, importantly for them, net interest income was a headwind for them last year in their wealth management unit. We do foresee signs of stabilization in the first quarter of this year. So we think they'll put up pretty sound results.
JULIE HYMAN: And Jason, maybe this is a little unfair because we haven't heard from them and we're not entirely through the season yet, but what's your top pick within the space right now?
JASON GOLDBERG: You know, I think, generally speaking, certainly have a bias towards the bigger banks. We've talked about improvement we're seeing on the capital markets front. You know, we haven't gotten into credit quality yet. We'll hear more about that as this week goes on from some of the regionals.
But while this first quarter feels OK, we do see loan losses materializing throughout the year progresses more so in the regional banks given their commercial real estate concentrations. So maybe a little bit more cautious there. You know, but despite the sell-off on Friday, I still feel very comfortable with names like, you know, JPMorgan. We're looking forward to Bank of America results, who also reports tomorrow.
JULIE HYMAN: And so are we. Jason Goldberg, thanks a lot. Good to see you
JASON GOLDBERG: Thank you.