Slimming down the investments on a bank’s balance sheet can reduce volatility in its earnings, said Mark Narron, senior director of North American banks at credit rating agency Fitch Ratings. Shedding investments also cuts the amount of so-called risk-weighted assets that are used by regulators to determine the amount of capital a bank must hold, he said.
Goldman Sachs’ asset and wealth management posted a 39 per cent decline in net revenue to $US13.4 billion in 2022, with its revenue from equity and debt investments sinking 93 per cent and 63 per cent, respectively, according to its earnings announced last week.
The $US59 billion of alternative investments held on the balance sheet fell from $US68 billion a year earlier, the results showed. The positions included $US15 billion in equity investments, $US19 billion in loans and $US12 billion in debt securities, alongside other investments.
“Obviously, the environment for exiting assets was much slower in the back half of the year, which meant we were able to realise less gains on the portfolio compared to 2021,” Mr Salisbury said.
If the environment improves for asset sales, Mr Salisbury said he expected to see “a faster decline in the legacy balance sheet investments”.
“If we would have a couple of normalised years, you’d see the reduction happening,” in that period, he said.
Clients are showing keen interest in private credit given sluggish capital markets, Mr Salisbury said.
“Private credit is interesting to people because the returns available are attractive,” he said. “Investors like the idea of owning something a little more defensive but high yielding in the current economic environment.”
Goldman Sachs’ asset management arm closed a $US15.2 billion fund earlier this month to make junior debt investments in private equity-backed businesses.
Private credit assets across the industry have more than doubled to over $US1 trillion since 2015, according to data provider Preqin.
Investors are also showing interest in private equity funds and are looking to buy positions in the secondary market when existing investors sell their stakes, Salisbury said.
The US investment-grade primary bond market kicked off 2023 with a flurry of new deals.
The market rally has “more legs” because investors are willing to buy bonds with longer maturities while seeking higher credit quality because of the uncertain economic environment, he said.
Goldman Sachs economists expect the Federal Reserve to raise interest rates by 25 basis points each in February, March and May, then holding steady for the rest of the year, Salisbury said.
More broadly, the “chilling effect” of last year’s rate hikes is starting to cool economic activity, Mr Salisbury said, citing softer hiring activity and slowing growth in rents.