Goldman Sachs’ Goodwill Writedown Signals Tough Choices Ahead

Goldman Sachs Group Inc.'s half-billion-dollar goodwill impairment was largely tied to the soured acquisition of a home improvement loan originator. Wider turmoil in the banking industry, however, hints it may not be the last big writeoff this quarter.

The collapse of three US banks this spring, persistently high interest rates, and poor bank stock price returns means any bank that bought or merged with another bank in recent years needs to seriously assess the value of goodwill—a non-cash asset linked to mergers or acquisitions—sitting on its balance sheet.

“What we’re seeing in the market with stock prices—we’re there,” said Sydney Menefee, partner at Crowe LLP and former chief accountant at the Office of the Comptroller of the Currency. “If you have a significant amount of goodwill, you’ve got to start having that conversation.”

Goodwill is an accounting construct, a non-cash asset that gets recorded when a company buys another and has to calculate how it came up with the purchase price. The company tallies all the hard assets like buildings and equipment as well as intangible assets like patents and brands. Goodwill captures what’s left over, such as the value of a trained workforce or dominance in a market.

Under US accounting rules, companies record goodwill as an asset on their balance sheets. Businesses must test it at least annually for signs of it losing value, or more frequently if there are indicators of so-called triggering events. Goldman’s $504 million goodwill hit, which it reported Thursday, came on the heels of the bank announcing that it wanted to sell the consumer unit it purchased the year before, confirming to the market that buying GreenSky was a bad idea. Triggering events can include deteriorating macroeconomic conditions, industry-specific pains, or overall financial performance, among others.

For banks this year, there have been a lot of triggering events.

“A lot of the conditions out there would warrant or may trigger an assessment of goodwill and potential for impairment,” Menefee said.

Under Pressure

Goodwill at US banks totaled $435 billion in the first quarter of 2023 compared with $425 billion the year before, according to the Federal Deposit Insurance Corp. If that goodwill loses value, bank earnings get dinged, and the ability to pay dividends comes under pressure.

A goodwill impairment, however, doesn’t impact all-important capital ratios that banks must maintain to meet regulator requirements. And because goodwill is by its nature tied to a merger or acquisition, an impairment also isn’t necessarily seen as a problem with a bank’s fundamentals. In 2020, many banks recorded sizable goodwill impairments, but some of the impairments were related to mergers from a decade earlier, said Brian Thies, director at Fitch Ratings.

“A writedown of a more recent transaction is probably more noteworthy than some legacy goodwill” writedown, Thies said.

Goldman, among the early reporters in bank earnings season, was especially vulnerable to a big goodwill hit because of its ill-fated foray into consumer lending, said Christopher Wolfe, managing director at Fitch. A year after completing the GreenSky purchase, Goldman talked about selling it off. The bank also warned analysts during a June investor presentation that it was evaluating whether it needed to impair its goodwill.

Not all bank acquisitions—and goodwill evaluations—face the same stresses as Goldman’s. But the market needs to be on alert given general bank industry woes, Wolfe said.

“I don’t think we’re expecting to see large writedowns across the banking space this quarter,” he said. “But there’s going to be some pressure on goodwill carrying values if we don’t see a recovery.”