Goldman’s plan B is unexpectedly looking much more like a B-plus

David Solomon’s essential message to investors over the past year has been that Goldman Sachs failed to become a consumer bank under his aegis, but that’s okay.

The Wall Street firm’s first-quarter earnings, which beat expectations because of a surge in bond-trading revenue, support his pitch. The CEO’S plan B looks more like a B-plus.

Goldman’s trading business grew 10 per cent year-on-year, and the division it sits in delivered an 18 per cent return on equity – double the figure in the last three months of 2023. It was a much better result in that business than rivals Jpmorgan and Citigroup reported for the same period, and was not due to any specific factor.

Basically, Goldman is good at trading. This enabled the bank to report earnings of US$4.1 billion where analysts had expected $3.1 billion, according to Visible Alpha estimates.

In one sense, Goldman is delivering more of the wrong thing. The $130 billion firm’s now-abandoned swerve into consumer banking, including the launch of its Marcus online bank and Apple-branded credit card, was designed to make it less sensitive to changeable markets revenue.

This reflected the fact that investors value unpredictable revenue less generously than other sources of income, like interest and wealth-management fees. Trading is also a balance-sheet-heavy business. Goldman’s trading assets crept up by 6 per cent during the quarter to a decade-high $508 billion.

One thing that has changed, though, is that Solomon and his fellow executives now tout the idea that fickle businesses are not equally choppy.

Financing, for example, is “more durable” in relative terms, though the 31 per cent increase in that kind of revenue in the first quarter is not the norm. It also helps that the activities Goldman temporarily pursued and then discarded have lost some allure.

Shares in Jpmorgan and its traditional-bank peers fell last week after they sidestepped questions about how the path of interest rates will affect their lending and deposit-taking businesses.

The timing is convenient for Solomon in another way. Next week, investors will vote on Goldman’s executive pay package, which will be an indirect referendum on the 24 per cent pay rise he’s getting this year.

Shareholders will also be asked whether they want to split his roles as CEO and chairman, a proposal that received 16 per cent support last year. Investors do not vote based on one quarter’s results, but Goldman's surprisingly successful Plan B sets the scene for a more constructive discussion.

Goldman Sachs on Monday reported earnings of $4.1 billion for the first quarter of 2024, a 27 per cent increase on the same period a year earlier and beating average analysts’ expectations of $3.1 billion, according to Visible Alpha.

The Wall Street firm’s fees from advising on mergers and underwriting securities issues increased 32 per cent year-on-year. Trading revenue increased 10 per cent.