Goldman Sachs Group, Inc. — Second-Quarter 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. The interim consolidated financial statements are unaudited and prepared under U.S. GAAP. Goldman Sachs operates through Global Banking & Markets, Asset & Wealth Management, and Platform Solutions.
Key Financial Metrics
| $ in millions, except per-share data | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 |
|---|---|---|---|---|
| Total net revenues | $10,895 | $11,864 | $23,119 | $24,797 |
| Pre-tax earnings | $1,736 | $3,544 | $5,729 | $8,200 |
| Net earnings | $1,216 | $2,927 | $4,450 | $6,866 |
| Net earnings applicable to common | $1,071 | $2,786 | $4,158 | $6,617 |
| Diluted EPS | $3.08 | $7.73 | $11.91 | $18.47 |
| ROE | 4.0% | 10.6% | 7.8% | 12.8% |
| Efficiency ratio | 78.4% | 64.5% | 73.3% | 62.0% |
Q2 net earnings fell 58% year over year and net revenues declined 8%. The implied pre-tax margin was approximately 15.9%, compared with approximately 29.9% in the prior-year quarter; the implied net margin was approximately 11.2%, compared with approximately 24.7%.
- Revenue mix: Investment banking revenue was $1.43 billion, down 20%; investment management revenue was $2.36 billion, down 2%; commissions and fees were $893 million, down 17%; market making revenue was $4.35 billion, down 11%; and net interest income was $1.68 billion, down 3%.
- Credit losses: Provision for credit losses was $615 million in Q2 and $444 million for the first half, compared with $667 million and $1.23 billion, respectively, in the comparable periods.
- Expenses: Operating expenses increased 12% to $8.54 billion in Q2 and 10% to $16.95 billion for the first half. Compensation and benefits were $3.62 billion in Q2.
- Balance sheet: Total assets were $1.57 trillion, up from $1.44 trillion at December 31, 2022. Cash and cash equivalents were $270.93 billion; trading assets were $400.33 billion; loans, net of allowance, were $178.13 billion; and shareholders’ equity was $116.49 billion.
- Funding and debt: Deposits were $398.85 billion, collateralized financings were $284.43 billion, unsecured short-term borrowings were $70.06 billion, and unsecured long-term borrowings were $230.81 billion.
- Cash flow: Six-month operating cash flow was $41.31 billion, investing cash flow was $(5.94) billion, and financing cash flow was $(6.66) billion. Cash increased by $29.11 billion during the first half.
- Liquidity: Average global core liquid assets were $409.65 billion in Q2. Average liquidity coverage ratio was 126% and average net stable funding ratio was 113%, both above the 100% minimum.
- Capital: CET1 capital ratios were 14.9% under standardized rules and 14.4% under advanced rules. The standardized total capital ratio was 18.8%; the Tier 1 leverage ratio was 7.0%; and the supplementary leverage ratio was 5.6%.
Material Changes Versus Prior Comparable Period
- Global Banking & Markets net revenues decreased 14% in Q2 and 15% for the first half, primarily due to weaker FICC intermediation and investment banking activity. Q2 investment banking fees declined as completed M&A activity fell, although equity underwriting improved.
- Asset & Wealth Management Q2 net revenues declined 4% and generated a $243 million pre-tax loss, compared with $207 million of pre-tax earnings in Q2 2022. Real estate investment losses and lower incentive fees outweighed higher private banking and management-fee revenue.
- Platform Solutions Q2 net revenues rose 92% to $659 million, but the pre-tax loss widened to $872 million from $366 million. Credit-loss provisions and expenses increased with growth in credit card and point-of-sale portfolios.
- Q2 operating expenses included a $504 million goodwill impairment related to Consumer platforms and approximately $485 million of commercial real estate impairments in consolidated investment entities. First-half impairments were approximately $840 million for commercial real estate plus $504 million of goodwill.
- The firm completed the sale of substantially all of the Marcus installment-loan portfolio during the first half. The sale produced approximately $(370) million of net revenue, including an approximately $100 million Q2 gain, and a related approximately $440 million reduction in credit-loss reserves.
- Headcount was 44,600 at quarter-end, down 2% from March 2023 and 8% from December 2022. First-half severance-related compensation costs were approximately $260 million.
- The firm repurchased $750 million of common stock in Q2 and $3.30 billion in the first half. Common dividends declared were $864 million in Q2. The quarterly common dividend was increased from $2.50 to $2.75 per share beginning in Q3.
Guidance, Outlook, Risks and Unusual Items
- Management expects a 2023 effective tax rate of approximately 22%. The filing does not provide consolidated quarterly revenue or earnings guidance.
- Long-term targets include firmwide ROE of 14%–16%, ROTE of 15%–17%, Asset & Wealth Management annual management and other fees above $10 billion in 2024, and Platform Solutions pre-tax profitability by the end of 2025.
- Asset & Wealth Management targets medium-term pre-tax margins in the mid-twenties and ROE in the mid-teens. The firm intends to reduce historical principal investments below $15 billion by the end of 2024 and exit the portfolio over the medium term.
- The firm is exploring a potential sale of GreenSky. Completion, pricing and financial impact remain uncertain, and the related Consumer platforms goodwill was impaired.
- Management identified continuing uncertainty involving inflation, interest rates, geopolitical conditions, investment banking activity, commercial real estate, consumer credit, market liquidity and potential increases in regulatory capital requirements.
- A 100%-weighted adverse economic scenario would have increased the June allowance for credit losses by approximately $0.8 billion, excluding possible qualitative adjustments. The allowance for loan losses was $5.23 billion, while nonaccrual loans were $3.27 billion.
- The proposed FDIC special assessment related to the failures of Silicon Valley Bank and Signature Bank could cost Goldman Sachs approximately $400 million pre-tax if adopted as proposed; the expense would be recognized when the rule is adopted.
- Legal proceedings remain extensive. Management estimated the upper end of reasonably possible aggregate losses, in excess of reserves, at approximately $2.2 billion for matters where a range could be estimated. The filing states that other proceedings could materially affect results in a particular period.
- The firm guaranteed that the Government of Malaysia will receive at least $1.4 billion in 1MDB-related assets and proceeds, subject to ongoing dispute regarding a potential $250 million interim payment.
- U.S. banking regulators proposed Basel III reforms in July 2023. If adopted as proposed, management expects the rules could materially increase regulatory capital requirements.
Investor Verification Priorities
- Verify the sustainability of investment banking and FICC revenues after the sharp year-over-year declines.
- Assess whether commercial real estate marks, goodwill impairments and other valuation changes require additional losses.
- Monitor Platform Solutions credit-card and point-of-sale growth, charge-offs, allowance coverage and the outcome of the GreenSky sale process.
- Reconcile the Marcus portfolio sale economics, including the approximately $(370) million net revenue impact and approximately $440 million reserve reduction.
- Evaluate the effect of proposed Basel III rules and the FDIC special assessment on capital, earnings and shareholder distributions.
- Review litigation, regulatory investigations, the 1MDB guarantee and the estimated $2.2 billion excess reasonably possible loss range.
- Confirm continued liquidity strength, including GCLA, LCR, NSFR, deposit trends and potential collateral calls following a credit-rating downgrade.