Three reasons why Goldman Sachs ended the year successfully

stock Goldman Sachs Group (NYSE:GS) rose Tuesday after the white-shoe investment bank reported outstanding fourth-quarter results that beat analysts’ estimates.

Fourth quarter revenue increased 7% year over year to $11.3 billion, and net income increased 51% to $2 billion, or $5.48 per share. Both of these totals easily beat consensus estimates.

For the full year, sales were $46.3 billion, down 2% year-over-year, and net income was $8.5 billion, down 24% year-over-year due to an 11% increase in costs.

Overall, the company had a pretty successful year, and there were three main reasons for its strong performance. And there were three reasons why the momentum could continue this year.

Number of asset management cases rapidly increases

A few years ago, Goldman Sachs attempted to enter the consumer finance space with the 2016 launch of Marcus, a digital bank, and the acquisition of GreenSky, a fintech platform that facilitates lending for banks and merchants. The strategy was to expand its revenue streams to better compete with other large financial services companies. But last year, Goldman Sachs made a strategic decision to scale back the plan because it was failing to generate adequate profits and had proven to be a drag on its bottom line. So it stopped providing loans to Marcus in early 2023 and sold GreenSky last October.

Instead, the company decided to simplify its structure and focus and focus on its strengths: investment banking and asset and asset management. In the fourth quarter, the Wealth and Wealth Management segment was a major revenue driver, generating $4.4 billion in revenue, up 36% quarter-over-quarter and 23% year-over-year. Revenues increased due to higher management fees due to increased total assets.

Stock trading profits explode

Goldman Sachs’ equity trading segment, an institutional trading platform within its Global Banking and Markets business, posted net revenue of $2.6 billion, up 26% from the fourth quarter of 2022. The stock broking segment led the way with $1.5 billion in revenue. Equity Finance generated revenue of $1.1 billion in the quarter, up 15% compared to the previous year, up 35%. The surge in the stock broking sector reflected increased net revenue from derivatives, while equity financing grew due to increased net revenue from prime financing for hedge funds and large institutional clients. Equity trading revenue offset a 24% year-over-year decline of $2 billion in fixed income currency and commodities (FICC) trading.

All year round. Goldman Sachs had a record year with equity finance revenue of $11.5 billion, up 5% from 2022. Typically, when the stock market performs well, as it did in the fourth quarter and all of 2023, stock trading profits typically rise.

Investment Banking for Growth

The most important thing about Goldman Sachs is investment banking. It ranked first in both transaction volume and value in 2023. According to Bloomberg, Goldman Sachs has ranked first in deal closing for seven consecutive years. However, 2023 was a terrible year for M&A overall, with deal volume down 14% overall, while deal value fell 41%. This is a decrease compared to 2022, which was also not a good year.

Accordingly, investment banking fees in the fourth quarter were $1.7 billion, a decrease of 12% compared to the same period last year, but an increase of 6% compared to the third quarter of 2023. However, investment banking fees declined throughout the year. % increase to $6.2 billion compared to 2022.

But there are some bright spots in investment banking. Goldman Sachs said its investment banking fee balance increased in the fourth quarter compared to the previous quarter, and 2024 is expected to be a better year for M&A as inflation is expected to slow and interest rates begin to fall.

“We are already seeing signs of a potential resurgence in strategic activity, which is reflected in our backlog,” Chairman and CEO David Solomon said on the fourth-quarter earnings call.

Goldman Sachs thus has the advantage of being a market leader in both investment banking and institutional trading while streamlining and refocusing its business. The company also has a strong wealth and asset management business that is focused on increasing durability by growing its private banking business for high-net-worth individuals and its alternative investment segment.

The company’s legacy and brand are built on these two businesses, and narrowing its strategic focus will help the company succeed. With a reasonably low valuation, Goldman Sachs is well positioned for growth in 2024.