The Goldman Sachs Group Inc. (NYSE: GS) earnings report released before the bell today (Wednesday) is one of the most dramatic examples of how U.S. banks are struggling to return to healthy profitability and revenue growth.
Goldman Sachs earnings came in at $1.84 a share, 58% lower than the same quarter last year. Revenue fell 30% to $6.05 billion.
Though dismal, the earnings beat analysts' estimates, which were as low as 70 cents a share – an 82% drop from last year's fourth quarter and a far cry from the whopping $8.20 a share in 2009.
"It looks like nothing's working right now," Jack Kaplan, portfolio manager at Carret Asset Management, told Reuters. "They were below expectations on virtually everything on the revenue side."
This was the second-lowest quarterly revenue for Goldman Sachs since the financial crisis, as U.S. banks' earnings continue getting squeezed from a weak global economy and increased regulation.
Another Disappointing Quarter for Goldman Sachs Earnings
This was the fourth consecutive quarter of declining revenue for Goldman Sachs.
The third quarter of 2011 was especially painful, with Goldman's revenue down 47.9% from 2010's third quarter. Goldman reported a loss of $428 million, compared to a $1.74 billion profit from the year before.
Goldman joins its banking counterparts in a year of staggering revenue and profit loss.
JPMorgan Chase & Co. (NYSE: JPM) last Friday reported fourth quarter earnings fell 23% from the same quarter last year, and revenue was down 17%. Citigroup Inc. (NYSE: C) followed Tuesday reporting an 11% drop in profits.
"It's likely 2011 will be the worst year for revenue growth for the banks since 1938, and so far 2012 isn't feeling much better," Michael Mayo, an analyst with Crédit Agricole Securities, told The New York Times. "The industry simply grew too fast over the past two decades and now it's downshifting. This process will take time, but the hit to revenue is happening now."
Trading and investment banking activities aren't the powerful money-makers they once were due to nervous investors pulling out of markets, and increased fees designed to protect customers. JPMorgan's investment banking revenue fell 30% in the fourth quarter, and Goldman's fell 43%.
Analysts had been drastically lowering expectations for Goldman earnings up until the report was released this morning. Goldman's fourth-quarter profit estimates three months ago were $3.14 a share – more than double The Street's consensus.
"Trading activity has slowed down dramatically, there's been a big drop in investment banking activity," Richard Bove, an analyst at Rochdale Securities LLC, told Yahoo Finance. "Mergers and acquisitions are down 10-15%, new equity offerings are down 15%, trading in things like governments and agencies have fallen off dramatically, trading in commodities is way down."
Weak U.S. Banking Sector Outlook
The lowered expectations for the U.S. banking sector stem from increased banking regulation, the struggling economic recovery, and turmoil from the European debt crisis.
The main question for the banking sector coming out of this quarter is how firms plan to cope with the new realities as they head into 2012.
"The big issue for the banks is, is this a cyclical or a secular problem? And the answer is, it's both," Bove told Bloomberg News.
Bove warned that banks like Goldman Sachs may never again see growth rates in excess of 10%.
"It's not going to happen because the leverage in the balance sheet is gone, the off-balance-sheet conduits are illegal, the variable-interest entities are limited, the structured-investment vehicles are gone," said Bove, describing activities now blamed for causing the 2008 financial crisis. "The leverage isn't there and the market isn't there."
News and Related Story Links:
- Money Morning:
It's Time to Bail on Bank Stocks
- Money Morning:
Big Banks Are About to Get Blasted by the Volcker Rule
- Yahoo Finance:
Bove Slashes Goldman Sachs (GS) Earnings Estimate by 66%
- The Globe and Mail:
Analysts backpedal on outlook for U.S. banks
- Bloomberg News:
JPMorgan May Report Record Profit
- The New York Times:
Wall Street Braces for Dismal 4th Quarter