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Investors await Goldman's US$5b answers as trading picks up
[NEW YORK] Last year, Goldman Sachs Group Inc executives met with some skepticism after unveiling an ambitious plan to grow revenue by $5 billion, whether or not markets remained subdued. Now that trading has picked up, Wall Street is hoping the bank can do even better.
On Tuesday, Goldman's chief executive officer, Lloyd Blankfein, is scheduled to speak at an industry conference in Miami Beach, where he intends to provide more information about the revenue-boosting effort.
It will be the first time Mr Blankfein himself tries to persuade investors with a formal, public presentation about the lofty goals Goldman has set. Since his deputies first laid out the revenue-growth strategy in September, analysts have peppered executives with questions about the underlying assumptions and cited concerns raised by investors.
For instance, Instinet analyst Steven Chubak told Goldman's finance chief in October that many of his clients wanted to know why Goldman thinks it can boost investment management revenue by US$1 billion, given the challenges money managers are facing more broadly. In a recent report, Evercore ISI analyst Glenn Schorr said shareholders remain "skeptical" about other components of Goldman's revenue growth plan, like consumer lending, despite assurances from senior executives.
"Mr. Blankfein will be providing an update on our business to investors (Tuesday), and we are in the early stages of delivering on the growth plan we outlined last fall," a Goldman spokeswoman said in an email.
Wall Street is hesitant to forecast that Goldman will be able to generate any of the promised US$5 billion, Wells Fargo analyst Mike Mayo said in an interview.
"This is the environment that Goldman has been waiting for all decade," said Mayo, who expects the bank to achieve US$3 billion of its US$5 billion target helped by volatility returning to stock and bond markets globally.
"If Goldman doesn't get it right in 2018, then management has some serious questions to ask." Trading had been a profit engine for Goldman Sachs for the decade leading into the 2007-2009 financial crisis, but lethargic markets, new regulations and tougher competition have since upended the business.
In 2009, Goldman boasted 19 per cent market share in bond trading, which generated US$121 billion in revenue across Wall Street, according to the bank's September presentation. But Goldman since lost nearly half that share as the revenue pool has declined by nearly half. Last year the bank reported its worst bond trading results since 2008, with revenue dropping 30 per cent.
As a result, Goldman is trying to grow businesses like investment management, while trying to generate more trading revenue from existing customers as well as new ones. It is also diving into Main Street banking, an area where it never previously had significant operations.
Goldman launched its digital consumer bank Marcus in 2016, primarily targeting credit-card borrowers who want to refinance into cheaper loans. By the end of last year, Marcus had originated US$2.3 billion in loans, and management expects to grow that figure by US$13 billion through 2020. The growth rate has caused concern among some investors and analysts, given recent signs across the industry that consumer credit risk is on the rise, particularly in cards.
Analysts are hoping Mr Blankfein will talk about bond trading on Tuesday and also provide more details on the revenue growth initiative. Some said the presentation itself is a step in the right direction for a bank that historically disclosed little about its strategy and declined to issue financial targets the way rivals like Morgan Stanley routinely do.
"Over the last many years, Goldman has been very shy about what it's going to do, so you never had a full score card to measure against," said Barclays analyst Jason Goldberg. "This is a very different Goldman Sachs today than it was 20-30 years ago."