Goldman Sachs stumbled while Bank of America surged in first quarter

Profits and revenue rose at Bank of America (BAC) during the first quarter while falling at Goldman Sachs (GS), offering a diverging look at how two financial giants fared during a challenging period for the banking industry and the markets.

Goldman, which is more reliant on traditional Wall Street businesses of deal making and trading, reported $3.2 billion in earnings during the quarter ending March 31. That was down 18% from a year ago, making it the first of the giant banks to report a drop from the year-earlier period.

Several of its mainstay revenue sources sputtered as investors fretted about everything from higher interest rates to the failures of two sizable regional banks in March. Investment banking revenue was down 26%, as new deals dried up, and advisory fees were down 27%. Revenues from fixed-income trading, another traditional Goldman strength, also fell. Goldman's stock closed Tuesday down 1.7%.

Goldman CEO David Solomon said in a conference call with analysts that he expects "big strategic" deal activity in the second half of the year but acknowledged that there is now a “higher risk of a credit contraction” following the turmoil of last month.

"We continue to be cautious about the economic outlook."

Bank of America, which has a bigger consumer lending business than Goldman but also a sizable Wall Street unit, reported earnings of $8.2 billion that were up 15% from the first quarter of 2022. Its stock rose less than 1% Tuesday.

Bank of America CEO Brian Moynihan struck a positive note about the state of the American consumer in a conference call with analysts even as he noted that his research team expects a recession in the third quarter.

Payments from consumers, he said, continue "to drive the US economy" and the financial position of these consumers "remains generally healthy." Credit and debit card spending tracked by Bank of America was up 6%. The bank did, however, set aside reserves of $360 million for future losses in its consumer unit due primarily to higher-than-expected credit card balances.

Bank of America outperformed Goldman in one key Wall Street category with a rise in trading, especially fixed income. Another key driver of earnings was its net interest income, which is the difference between what a bank earns on its loans and pays out on its deposits.

The Federal Reserve's aggressive rise in interest rates over the past year boosted this measure of income for Bank of America and other giant consumer banks, including JPMorgan (JPM) and Wells Fargo (WFC), because it allowed them to charge more for their loans. Bank of America's net interest income was up 25% compared to the year-ago quarter.

The concern now is that those margins could begin to fall across the industry as banks begin to pay more aggressively for deposits and lure new customers with higher rates.

Bank of America's net interest income was roughly flat when compared to the fourth quarter, dropping by a slight $233 million, as were total loans. Investors are concerned banks could pull back on new loans, which would affect the larger economy by reducing the flow of credit to businesses and consumers.

There are signs that Bank of America is beginning to shell out more to keep and attract depositors. It paid 1.38% on average on interest-bearing deposit accounts in the first quarter, versus 0.96% in the fourth quarter.

Even before the turmoil in March, lenders big and small had been losing depositors to money market funds that were willing to offer higher yields. Bank of America couldn't escape that trend. Its deposits at the end of the quarter were $1.9 trillion, down $20 billion from the end of 2022 and $162 billion from a year earlier.

Its deposit rates are still low when compared to many other banks, as Wells Fargo analyst Mike Mayo highlighted during a conference call with executives Tuesday. "You have the lowest payment on deposits," he said. "What keeps your customers around?" Executives told him depositors stick with the bank because the majority use it for everyday payments and have been customers for more than a decade.

Goldman also lost consumer deposits during the period ending March 31. They were down 3% from a year ago and the last quarter as customers pulled $11.6 billion from Goldman's banking division during the first three months of the year. The bank's deposit balances at the quarter's end were at their lowest level since the fourth quarter of 2021.

Goldman has been reevaluating its foray into consumer banking and seeking strategic options for that part of its business. Its results released Tuesday included a loss of about $470 million related to a partial sale of a loans portfolio.

On Monday Apple (AAPL) said Monday that it is launching high-yield savings accounts for Apple Card holders in partnership with Goldman, marking the tech company's latest foray into payments.

"This gives us another deposit channel," Solomon told analysts Tuesday. "This is an interesting opportunity for the firm."

Some of the challenges in Goldman's more traditional Wall Street businesses were the result of a larger slowdown in markets during the first quarter and greater uncertainty about the economic outlook. A number of big banks, from JPMorgan to Bank of America, said that investment banking fees were down during the quarter. Many of these giant banks also reported less fees from underwriting as IPOs slowed.

Trading revenues at Goldman also fell 13%, including a 17% drop in fixed-income trading. Bank of America, by contrast, actually increased its fixed-income trading revenue from a year ago by 27%.

Solomon, Goldman's CEO, said the company's fixed-income trading drop is partly because of "significant outperformance" in the year-ago quarter. The company still collected revenues from that business of $4 billion.

"It was a solid performance," he said.

JMP Securities' Devin Ryan told Yahoo Finance it was a "good quarter" for Goldman despite some of the "noise" Tuesday. The company, he said, has some chances now to grab some new market share from all of the recent banking stress.

"Goldman has navigated a lot of crises over its history and through those crises it takes market share," he said.

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