Goldman Sachs Did Well But Challenging Times Ahead

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What's going on?

Goldman Sachs reported 4th quarter earnings on Wednesday, and apart from a very big legal charge relating to the run-up to the financial crisis (that investors already knew about), it posted pretty solid numbers. Its stock price was down due to the wider market, but it outperformed other big banks by about 2% (indicating investors liked the results).

What does this mean?

Goldman was the last of the major US banks to report its earnings – J.P. Morgan kicked things off last week. Overall, US banks’ profits could probably be characterized as pretty good – and a little better than expected. Many of the banks (like Citigroup and Bank of America) reported their biggest annual profit since the financial crisis. Fewer fines versus previous years helped (Goldman was an exception) while profits also benefitted from cost-cutting (banks continue to cut workers and other expenses). If it wasn’t for the broader market turmoil, investors might have been pretty happy.

Why should I care?

The bigger picture: Investors are getting more concerned about banks’ exposure to energy companies. The low oil price is seriously hurting many energy companies and perhaps hampering their ability to pay back loans that they have received from banks. If the oil price continues to go down, bad loans will probably be a bigger drag on banks’ profits. Regional banks in energy-heavy US states are most affected as they tend to make a higher proportion of their loans to energy companies, while the big banks can probably withstand the pain better.

For the stock: Goldman’s stock is at its lowest level since 2013. Part of that is because of the broader market selloff (see above) and the underperformance of banks in general. Banks tend to do well when the economy does well and since a possible slowdown is at the top of many investors’ minds, bank stocks are suffering.

Originally posted as part of the Finimize daily email.

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