Finance

Goldman Sachs bankers had a busy start to the year. But analysts are already wondering how long rapid-fire dealmaking can last. (GS)

  • Goldman Sachs reports its first-quarter earnings on Wednesday, April 14.
  • The bank is expected to report record results in ECM and M&A advisory.
  • From wealth management to trading, these topics are top-of-mind for analysts.
  • See more stories on Insider’s business page.

It’s been a busy three months for one of the top banks on Wall Street.

Goldman Sachs has seen a wave of recent partner departures, including its co-head of asset management Eric Lane and its consumer-banking boss Omer Ismail, and a series of tech-talent exits from its consumer bank Marcus.

Meanwhile, deal volumes have been huge. Goldman Sachs’ investment-banking business maintained its top position in the league tables for equity capital markets and M&A revenue, according to Dealogic. But two leaked pitch decks created by Goldman analysts showed junior bankers struggling with the workload.

Goldman Sachs will report its first-quarter 2021 earnings on April 14. In the countdown to earnings day, analysts have begun polishing their questions and getting ready to drill in on a few key points.

Here’s what they’ll be on the lookout for.

ECM and M&A advisory activity is at a record high — but can it stay that way?

Goldman’s ECM revenue — about $1.22 billion for the first quarter — is already more than half of what it raked in for all of 2020, according to Dealogic. And Goldman has ranked second this year for revenues from SPAC IPO issuances.

Goldman pulled in more than $568 million from SPAC IPOs alone, according to data from Dealogic, more than all of last year.

But to Chris Marinac, director of research at Janney Montgomery Scott, it’s worth keeping in mind that many of the incredible year-over-year increases are versus slow quarters last year at the start of the coronavirus pandemic.

“It becomes — I don’t want to say an ‘easy’ comparison — it becomes an almost unfair comparison in their favor,” Marinac said. “The whole situation is night and day from where it was this time a year ago.”

Across Wall Street, ECM deal volumes surged by some 210% year-over-year during the first quarter, according to a preview note from Brennan Hawken, an analyst at UBS.

Goldman should see a 31% increase in volumes in the first quarter versus the fourth quarter of 2020, Hawken’s note predicted; with a 225% increase in ECM activity year-over-year.

Goldman was also busy on the M&A front.

Hawken’s note forecasts a 30% quarter-over-quarter jump in completed M&A advisory volumes. Revenue forecasts are pegged at more than $1 billion for the quarter — roughly flat versus the previous quarter. But if the bank maintains that pace through 2021, it would notch a 40% jump in revenue versus last year.

Still, the note said record-setting volumes continuing was “unlikely,” as the scorching pace of deals probably won’t last.

“Sustainability — that’s a big question, and that will be a big question for management,” Hawken told Insider in an interview.

For one thing, the SPAC pipeline, and the available capital for PIPE investments, has seen a recent slowdown.

And Hawken said the return to some of the old rites of investment banking, like flying to in-person client meetings, could actually slow activity.

“You can line up eight Zoom calls in an eight-hour day and end up being very productive because there’s almost no friction to your day,” Hawken said.

“When you have to go and meet with clients in Chicago, San Francisco, LA, Miami, what have you, instead of doing eight meetings in a day, maybe you can manage four or five,” he added.

Goldman execs haven’t given hints on trading yet — here’s what analysts are predicting

A preview note from research analysts at Deutsche Bank expects strong trading performance.

“Management hasn’t provided specific guidance on trading, but has noted that prime brokerage activity (in January and February) has been robust,” the Deutsche Bank analysts wrote.

They predict a 21% jump in equity trading revenue and a 12% rise in FICC trading (meaning bonds, currencies, and commodities) versus last year.

The UBS preview note also says that an “upside” scenario for Goldman would be driven by strong capital markets activity.

The rise of retail trading that was a theme throughout 2020 went into overdrive in February with the GameStop trading frenzy.

“The retail-driven surge in trading pushed equities and options volumes to new heights,” UBS analysts wrote, referring to trading activity generally.

Goldman’s consumer, wealth, and asset-management should turn in strong numbers

Analysts generally expect to see strong results out of Goldman’s recently reorganized consumer and wealth management and asset management divisions.

Markets trading near all-time highs should bode well for wealth and asset-management businesses across Wall Street.

Goldman has been focused on growing its wealth-management offerings, particularly for smaller clients.

Its consumer and wealth-management arm includes Marcus and private wealth units, while the asset-management arm encompasses Goldman Sachs Asset Management and merchant banking.

“We’re trying to build an integrated end-to-end capability from ultra-high net worth down through mass-affluent,” John Waldron, the firm’s chief operating officer, said last month during a virtual financial services conference.

Devin Ryan, an equity research analyst at JMP Securities, told Insider that, within consumer and wealth management, he expects to see continued asset growth, with a growing number of client accounts from a “relatively small” base.

“Outside of the $180 million provision from the GM card disclosed in the 10-K, we expect to see modest benefits within credit trends as the macro backdrop has trended favorably, creating a bit of relief,” Ryan said, referring to Goldman serving as the issuing bank for the auto giant’s credit card programs set to start this fall.

Within asset management, Ryan expects strong customer asset growth from fundraising activities and portfolio appreciation to help drive an “outsized” quarter.

Goldman’s net consumer and wealth management revenue rose 15% to $6 billion in 2020 from the previous year — $4.8 billion from wealth-management operations and $1.2 billion from consumer banking — thanks to a mix of higher credit-card loan and deposit balances in consumer, and higher fees across wealth management.

Consumer and wealth management assets under supervision rose to a record $615 billion from $561 billion a year prior. The asset-management division reported assets under supervision of some $1.5 trillion at year-end, up from $1.3 trillion.

Banks have to pay to keep talent — and that could turn into a big expense question

With burnout now the talk of Wall Street, firms like Credit Suisse, Warburg Pincus, and Apollo Global Management are giving junior employees raises or retention bonuses.

Hawken thinks the topic may come up in conversation on analyst calls.

“It’ll come up, because the way in which folks like me might be concerned about it is: Will it have an impact on the expense side?” Hawken said.

“Are we going to see some upward pressure on the comp ratio that might not otherwise be there? And could it have an impact on turnover, which impacts productivity?”

He summed up how the issue can hurt bank performance: “If you tick off of a bunch of a your junior bankers and they decide, ‘You know what, forget this — it’s just not worth it,’ then you’re going to have greater frictional costs,” he said.

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