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Goldman predicts bumpy recovery, says problem loans could rise in 2Q

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A top Goldman Sachs executive said Wednesday that the economic recovery is likely to be bumpy and that problem loans may climb even higher than the firm projected at the end of March.

The downbeat assessment came one day after JPMorgan Chase Chairman and CEO Jamie Dimon said that the U.S. government’s response to the coronavirus crisis could help fuel a rapid economic rebound. For its part, Goldman is projecting a 4% decline in gross domestic product this year, followed by a 6.5% increase in 2021.

The Dow Jones Industrial Average has risen by more than 25% since late March, which suggests that investors are anticipating a strong recovery as shelter-in-place orders are lifted in most states.

“I think obviously we’d all root for that,” Goldman President and Chief Operating Officer John Waldron said Wednesday at an industry conference. “But I think the risks ahead are that it doesn’t go quite that smoothly.”

Goldman has responded to the economic fallout of the pandemic by boosting its loan-loss reserves and tightening its underwriting.

Waldron said that Goldman’s credit provision, which leaped to $937 million in the first quarter from $224 million a year earlier, could climb higher in the second quarter, as the economic contraction has proved to be worse than the company modeled two months ago.

In the consumer realm, Goldman reported $7 billion in outstanding loans at the end of the first quarter, which was unchanged from three months earlier. “This reflects us being careful and cognizant of the credit cycle we are operating in,” Waldron said Wednesday. “We continue to tighten our standards and manage our risk prudently.”

In corporate lending, Goldman saw a sharp increase in loans outstanding during the first quarter, as did many banks, since companies were drawing on existing credit lines in an effort to preserve liquidity at the start of the crisis.

The loans, which are not federally guaranteed, are refinancings of student-loan debt held by prime borrowers primarily with advanced medical degrees.
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Still, amid the sharp contraction in U.S. economic activity, Waldron said middle-market companies are getting squeezed, as they’ve been unable to tap government support or access the capital markets.

A Federal Reserve loan program aimed at helping middle-market companies is expected to be up and running soon, though it is unclear how much use it will get. Goldman is less exposed to credit risk than most other banking companies, with loans comprising just 12% of the firm’s total assets.

Other parts of Goldman’s business have seen mixed effects from the crisis. In wealth management, the company has decided to slow hiring activity this year, according to Waldron. He also said that Goldman will delay the launch of a digital wealth offering until 2021.

But the Wall Street firm’s burgeoning deposit franchise has benefited from the pandemic. Consumer deposits in Goldman’s Marcus unit have risen by 10% since March 31 to more than $80 billion, Waldron said. Many banks have seen a surge in deposits as more households seek the safety of insured deposits at a time of heavy volatility in the stock market.

Waldron said that the pandemic has validated the company’s branchless banking model. “We believe this crisis is accelerating the trend towards digital banking,” he said.

Goldman is taking a phased approach to reopening its offices in various locations around the globe. In certain Asian countries, the company is building toward having roughly half of its employees returning to the office, compared with about 10% in continental Europe.

In the U.S. and London, a core group in the company’s market-facing businesses are expected to return to offices over the next several weeks.

“There’s no doubt that we’re learning a lot about operating efficiency in this period, with 98% or so of our people having worked from home,” Waldron said. “I think the ability for us to be more digitally transformational and automate our processes faster than we would have guessed is for sure in front of us.

But Waldron said that the work-from-home model has significant downsides for Goldman.

“Our firm thrives on connectivity, on collaboration, on teamwork, on learning from each other, sitting around a table comparing notes on a problem and giving notes to a client,” he said. “That’s a lot harder to do consistently by video.”

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Economy Loan-loss provisions Credit quality Deposits Goldman Sachs Coronavirus
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