GS Goldman Sachs Group Inc

By Peter Rudegeair 

For many Americans, 2020 was a year to forget. For Goldman Sachs Group Inc., it was one for the record books.

Fueled by the markets' quick recovery from the worst of the pandemic-induced recession, Goldman generated $44.56 billion in annual revenue, the most since 2009, harking back to the last time the bank successfully navigated a crisis and its aftermath. Trading revenue for 2020 reached a 10-year high.

The $4.51 billion in fourth-quarter profit that the Wall Street firm reported on Tuesday, or $12.08 per share, was more than double Goldman's profit from the same quarter a year ago. Both quarterly net income and quarterly revenue of $11.74 billion were much better than the expectations of analysts polled by FactSet, who forecast profit of $7.39 a share on revenue of $9.99 billion.

For the U.S. banking industry, 2020 was a roller-coaster year. Markets plunged and economic activity declined in the spring as the coronavirus spread across the country. With many businesses closed and many consumers out of work, banks girded themselves for widespread defaults. A robust federal spending program helped forestall the worst-case economic scenario, and in earnings reports last week, bank executives signaled the economy has held up better than expected.

On Friday, JPMorgan Chase & Co. said fourth-quarter profit soared 42% to a record $12.14 billion after the bank released $2.9 billion from its stockpile of funds previously set aside to cover soured loans. On Tuesday, Bank of America Corp. said profit fell 22% but topped analysts' expectations after it released $828 million from its loan-loss reserves.

With its relatively small loan book and heavy exposure to underwriting and trading securities, Goldman was better placed than peers for the environment of the past several months. Initial public offerings, corporate borrowing and major stock indexes hit new records in 2020, all trends that Goldman capitalized on.

Trading revenue rose 23% from a year earlier to $4.27 billion, and the firm's investment bankers brought in $2.73 billion in revenue, a 49% increase from 2019's fourth quarter. The boom in stock offerings, including IPOs of tech companies and so-called blank-check companies, was particularly lucrative for Goldman: The fees it earned in the fourth quarter from underwriting stocks were a record and exceeded the fees it earned from advising on deals for the first time.

Chief Executive David Solomon told analysts on a conference call that some of the business Goldman won with top trading clients should be more sustainable than 2009 given that they occurred in a more competitive environment. In investment banking, Mr. Solomon said he expected activity levels in 2021 to be below those in 2020, due in part to investors starting to cool off on blank-check companies, also known as special-purpose acquisition companies, or SPACs.

"You have something here that is a good capital markets innovation," Mr. Solomon said of SPACs. "But like many innovations, there's a point in time as they start where they have a tendency maybe to go a little bit too far and then need to be pulled back or rebalanced."

Compared with its rivals, Goldman's profit was less affected by large provisions for future expected charge-offs, given the nascency of its corporate-banking and consumer-finance offerings. Goldman held about $8 billion in consumer-loan balances, split roughly equally between its personal-loan business and co-branded credit card with Apple Inc., but performance has been better than executives expected.

Like other banks, though, the profitability of Goldman's lending and deposit-taking business has been crimped by low interest rates and stricter loan-approval standards. Mr. Solomon said that Marcus, as Goldman's consumer-banking division is known, is likely to report a larger pretax loss in 2021.

Additionally, Mr. Solomon said that Goldman was continuing to spend money to develop new Marcus products, including a digital-investing platform that will debut in the first quarter and an online checking account that will arrive later this year.

Shares in Goldman rose some 60% between the end of October and mid-January, hitting an all-time high of $307.87 last week and vaulting the bank's market value above $100 billion. The rally in Goldman's stock followed news that the firm reached a $2.9 billion settlement with the Justice Department over a yearslong investigation into its role assisting a corrupt Malaysian government fund known as 1MDB.

Shares slipped about 1% in midday trading Tuesday.

One big change at Goldman from the last time it reported revenue this high is how much of it went into employees' pockets. In 2009, the size of Goldman's bonus pool was a source of populist outrage. For 2020, compensation expenses totaled $13.31 billion, or roughly 30% of revenue, a record low ratio, said Chief Financial Officer Stephen Scherr.

Overall operating expenses in the fourth quarter were $5.91 billion, down 19% from the same period in 2019. Fourth-quarter compensation expenses also fell 19% to $2.48 billion.

The bank's return on equity, a measure of how profitably it uses shareholders' money, was 21.1% in the fourth quarter.

Write to Peter Rudegeair at Peter.Rudegeair@wsj.com

(END) Dow Jones Newswires

January 19, 2021 13:00 ET (18:00 GMT)

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