- Despite laying off 6% of its workforce, expenses stand to remain high in the coming months.
- The macro environment remains tough with no end in sight.
- Executives said there is more work ahead for Goldman to reach profitability in its newest division.
When Goldman Sachs reported quarterly earnings Tuesday, some watchers hoped CEO David Solomon would press the reset button by introducing a slimmed down, reorganized company ready to get back to its core business of investment banking.
Instead, Solomon found himself fielding questions about rising costs at the end of last year, unexpected expenses that stand to drag down earnings this quarter, and the bank’s ability to meet its return targets without a rebound in M&A and other deal fees.
Solomon’s responses suggest a financial picture that remains murky, sending the bank’s stock to close down 6.5% on Tuesday — and raising questions about whether the bank is done with its cutting less than a week after laying off roughly 3,000 employees, or 6% of Goldman Sachs’ total headcount.
“The real problem lies in the fact that operating expenses shot up 11%, while revenues tumbled,” Octavio Marenzi, CEO of management consultancy Opimas, said in an emailed statement. “This strongly suggests more cost cutting and layoffs are going to come.”
A spokesperson for Goldman Sachs said: “We continue to focus on cost discipline, we’re looking at expenses in every corner of the firm and that will take time to be reflected in our results.”
Goldman’s fourth-quarter earnings released Tuesday showed that net revenues at the bank fell 16% compared to the same period in 2021, to $10.6 billion. Operating expenses, meanwhile, jumped 11%, year-over-year.
“Simply said, our quarter was disappointing and our business mix proved particularly challenging. These results are not what we aspire to deliver to shareholders,” Solomon told Wall Street analysts on a conference call Tuesday.
Solomon also made clear that the firm’s effort to “rightsize” the business, including through cost-cutting, may not be over. “We have, and continue to be, incredibly focused on managing our financial resources, especially in light of the worse-than-expected backdrop in the fourth quarter,” he said.
Here are four key takeaways from fourth-quarter earnings that could influence Goldman Sachs’ cost-cutting efforts in 2023.
Expenses could remain high in the first quarter
Given Goldman Sachs’ elevated operating expenses in the fourth quarter, some Wall Street analysts expected severance costs related to the recent round of layoffs to be baked into the firm’s results. Instead, they learned that those charges will be included when Goldman reports its first-quarter results this April, suggesting expense levels won’t fall anytime soon.
“Just really to be honest, I was kind of surprised to not hear that there were restructuring and severance charges in the fourth quarter, just given how elevated the expenses were,” UBS’ Brennan Hawken said.
“Are you doing enough on compensation?” Hawken asked. “I get it, nobody is buying Goldman today for 2022 results, but still the results seem to set up a challenging entry point for the beginning of the year.”
Denis Coleman, Goldman Sachs’ chief financial officer, confirmed that due to the timing of the job cuts, severance costs will be factored into the bank’s earnings in the first quarter of this year. Ultimately, Coleman said during the call, Goldman expects to save $200 million in 2023 from the job cuts and $475 million overall.
Even as compensation at Goldman Sachs in 2022 overall fell 15% compared to 2021, employee expenses in the fourth quarter rose year-over-year to $3.8 billion, the bank reported Tuesday.
And as Insider recently reported, many laid-off Goldman employees will remain on the bank’s payroll for months before even getting severance, thanks to state rules requiring large companies to give advance notice to employees before laying them off.
A big bet on diversification
Goldman’s consumer ambitions have long been a point of contention in the run-up to the reorganization of the firm announced last fall, as Insider has previously reported. January’s job cuts come as Goldman Sachs continued to lose money last year within its newest division, Platform Solutions, which encompasses some of the old pieces of Goldman’s Consumer and Wealth Management business before the reorganization.
On Tuesday, fourth-quarter earnings figures confirmed that Platform Solutions, which includes the bank’s Apple Card partnership, point-of-sale lending product Greensky, and its transaction banking business, lost nearly $4 billion in profit from 2020 to 2022. (In the fourth quarter, much of that came from a large increase in credit reserves, which totaled more than $780 million).
While revenue within Platform Solutions rose to $513 million between October and December, so too did operating expenses. In the fourth quarter, they were 66% higher compared to last year, although they fell from the quarter prior.
“Our focus remains singularly on driving towards profitability of this segment, but there will continue to be a period of time during which we lose money until we reach that point of ultimate profitability,” Coleman said during the call.
Goldman’s multi-year push under Solomon to diversify revenues by expanding into consumer finance stands in contrast to Morgan Stanley, which also reported earnings on Tuesday.
Goldman’s multi-year push under Solomon to diversify revenues by expanding into consumer finance stands in contrast to Morgan Stanley, which was rewarded by shareholders on Tuesday for its successful push into wealth management. At Morgan Stanley, profits fell 40% year-over-year thanks to the dealmaking drought, but the firm’s results were stronger than expected with especially strong results in wealth management.
The macro landscape has CEOs scared
During the call with Wall Street analysts Tuesday, Solomon also acknowledged the bleak, or at least unknown, economic backdrop that has torn through two of the firm’s core businesses: advising on mergers and acquisitions and underwriting debt and equity in companies. Investment banking fees at Goldman fell 48% in the fourth quarter compared to last year, while equity underwriting plummeted 82% relative to 2021.
Across Wall Street, investment banks contended with a volatile economic environment in 2022 as the Federal Reserve aggressively raised interest rates and put a damper on a blockbuster run of dealmaking.
“Our clients are thinking a lot about how to navigate this complex backdrop. CEOs and boards tell me they are cautious, particularly for the near term,” Solomon said. “They’re rethinking business opportunities and would like to see more stability before committing to longer-term plans.”
At one point, Solomon was asked whether the bank needs dealmaking to return in 2023 to meet its targets, or whether the expense reductions would help close the gap. Solomon said an improved capital markets environment “would certainly help,” before adding: “We talk about our targets in a normalized environment.”
Cutting expenses through attrition
To be sure, Goldman Sachs might not have to resort to more job cuts as it looks to slim down expenses in 2023.
For one, attrition might help move the needle, especially among rainmaker bankers who use this year’s bonus season as an opportunity to jump ship. Goldman Sachs will begin announcing annual incentive rewards on Wednesday.
While bonuses are down across Wall Street this January, at Goldman they have been particularly impacted by Solomon’s reorganization and the slowdown in markets. Insider has previously reported, for example, that some Goldman executives see compensation falling to levels last seen a decade ago.
Goldman Sachs could also gently push employees, particularly higher-level executives, out the door. According to one Goldman insider, some of the bank’s managing directors were quietly instructed during last week’s layoffs to find other employment or risk getting a pink slip.
Hayley Cuccinello contributed to this report.