Goldman warns it could slow hiring and cut costs if business slumps

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July 18 (Reuters) – Goldman Sachs Group Inc (GS.N) on Monday reported a less-than-expected 48% slump in quarterly profit, cushioned by strength in fixed income trading, but warned that hiring is slowing and costs could be reduced if the economic outlook worsens.

Federal Reserve rate hikes aimed at taming runaway inflation have rattled global financial markets, stifling corporate appetite for deals and making them shy away from bids in equities and bonds.

Goldman’s investment banking revenue fell 41% to $2.14 billion in the second quarter as fees for both stock and bond subscriptions fell along with fees for listing and mergers and acquisitions advisory services .

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“Given the challenging operating environment, we are again closely reviewing all of our future spending and capital expenditure plans to ensure our resources are being used optimally,” Chief Financial Officer Denis Coleman told analysts on a earnings call.

“Specifically, we have made decisions to slow hiring rates and lower certain professional fees going forward, although it will take time for these actions to be reflected in our results.”

Goldman Sachs CEO David Solomon said the market environment had become “more complicated” due to a combination of macroeconomic conditions and geopolitics, citing the war in Ukraine.

“We see inflation ingrained in the economy,” he said. “And what is unusual about this particular time is that both demand and supply are being affected by exogenous events, namely the pandemic and the war.”

Despite the slump in deals, Goldman shares rose 3% as revenue at the Global Markets unit, which houses its trading desks, rose 32% to $6.47 billion, with revenue from fixed income, Commodities and Trading up 55% and Equity Earnings up 11%.

Goldman’s earnings report caps big banks’ profits, mirroring rivals JPMorgan Chase & Co (JPM.N) and Morgan Stanley (MS.N), both of which reported that investment banking revenues more than halved. However, Goldman’s trading unit outperformed JPMorgan Chase and Citigroup (CN), which reported increases in market earnings of 15% and 25%, respectively, last week.

“Goldman has demonstrated once again that it can excel in challenging markets when it gets a top shot in each of its four businesses,” Wells Fargo banking analyst Mike Mayo wrote in a note.

According to data from Ernst & Young, there were 305 IPOs worldwide in the second quarter, raising $40.6 billion, down 65% year over year.

Goldman Sachs logo is seen on the trading floor of the New York Stock Exchange (NYSE) in New York City, New York, the United States, 17 November 2021. REUTERS/Andrew Kelly

The value of announced deals fell 25.5% year over year to $1 trillion in the quarter, with M&A activity in the United States plummeting 40%, according to Dealogic data. Continue reading

“The news from the banks has certainly been very bad for the most part,” said Rick Meckler, a partner at Cherry Lane Investments, adding, however, “It wasn’t unexpected given investment banking earnings are really falling off the table and some of them the banks have taken up large credit reserves.”

Goldman’s net sales fell 23% to $11.86 billion in the second quarter, and earnings nearly halved to $2.8 billion, or $7.73 per share.

Wealth management was another pain point, with net sales of $1.08 billion, down 79% from Q2 2021.

CONSUMER FOCUS

Solomon has worked to reduce the bank’s reliance on volatile trading and investment banking by shifting focus to Marcus, its consumer banking unit.

Consumer and wealth management saw net income increase 25% to $2.18 billion, driven by higher management fees and credit card balances.

However, if the Federal Reserve continues to raise borrowing costs to levels that constrain consumer spending, demand for credit could be impacted.

Goldman has retained $667 million to cover loan losses, compared to a net income of $92 million in the same period a year ago.

The US Federal Reserve has attempted to stem a relentless rise in prices and has committed to a ‘soft landing’.

In June, the Fed raised interest rates by 75 basis points, the largest hike since 1994, as inflation unexpectedly rose despite expecting it to have peaked.

Goldman’s net interest income rose 6% to $1.73 billion.

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Reporting by Saeed Azhar in New York, Niket Nishant and Noor Zainab Hussain in Bengaluru; Additional reporting by Bansari Mayur Kamdar; Edited by Arun Koyyur and Nick Zieminski

Our standards: The Thomson Reuters Trust Principles.

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