Finance

Goldman Sachs chief insists bank can close valuation gap with rivals

Goldman Sachs chief executive David Solomon has insisted the bank can persuade investors to assign a higher value to its stock, although he warned it may take time and the Wall Street firm will not always perform as strongly as it did in its most recent blowout quarter.

In an interview with the Financial Times, Solomon declined to give a timeframe for closing the valuation gap versus its megabank peers. He insisted, though, that the market would eventually re-rate Goldman’s stock if it delivered on a strategy to diversify from investment banking and trading and grow in more predictable businesses such as consumer banking and asset management.

“I don’t focus on what the time period will be. I just know that if we keep growing the firm and delivering on our plan over time, the stock and the valuation will take care of itself and we’ll get rewarded if we perform,” Solomon said.

Under Solomon, Goldman’s stock is up about 80 per cent and recently hit an all-time high, benefiting from an unprecedented boom in dealmaking and stock market volatility during the coronavirus pandemic. However, it still trades at about 1.5 times the bank’s book value, lagging peers JPMorgan Chase and Morgan Stanley, which trade at closer to two times.

Solomon spoke to the FT after Goldman posted third-quarter earnings that put it on track for a record year, largely on the back of its investment banking and trading units. Solomon said “not every quarter will be as good as this quarter. But I think the firm’s in really, really good shape.”

Stellar profits from securities trading and investment banking — businesses which are unpredictable over time — will not on their own change investors’ perception of Goldman, which has pivoted under Solomon to try to generate stickier streams of revenue.

Solomon, 59, a 22-year Goldman veteran who developed a mid-life passion for DJ-ing, this month marks three years as chief executive of one of the world’s best-known banks. Before running Goldman, Solomon led its investment bank and was elevated to group co-president, sharing that job with Harvey Schwartz in a chief executive succession race.

His tenure so far has been marked by hefty profits, a pruning of the bank’s senior ranks, contending with the Covid-19 pandemic, and an effort to convince investors and regulators to see Goldman differently.

David Solomon is a 22-year Goldman veteran who developed a mid-life passion for DJ-ing, this month marks three years as chief executive of one of the world’s best-known banks © Trevor Hunnicutt/Reuters

In the aftermath of the 2008 financial crisis, Goldman, under Solomon’s predecessor Lloyd Blankfein, doubled down on investment banking and trading. The result was a stock price that stagnated while peers such as Morgan Stanley, long Goldman’s principle rival, branched out into new businesses like wealth management, which promises the sort of stable fee-based income investors and stock analysts want.

Regulators also deem trading to be risky and so holds Goldman to more stringent capital requirements than its peers.

“They suffered a lot from the post-crisis period from remaining the same company in terms of strategy,” said Christian Bolu, a banking analyst at Autonomous Research. “The Goldman strategy was not as decisive.”

Some of the bank’s initiatives started under Blankfein but have been formalised and more clearly communicated to investors, as evidenced by Goldman last year hosting its first investor day since becoming a public company in 1999.

The strategy Solomon articulated is to grow market share in Goldman’s existing core businesses of investment banking and trading, while expanding into four newer areas: third-party alternative asset management; transaction banking; wealth management; and consumer banking under its Marcus digital brand. These plans are accompanied by a goal to cut $1.7bn in costs by 2023.

To bolster the consumer push, Goldman last month agreed to buy online loans provider GreenSky for $2.2bn. For some, the deal highlighted worries around the amount of shorter-term, small-dollar lending Goldman has done through Marcus, which in total has made almost $10bn in loans.

“I think the one area where I still hear some concern from folks is on Marcus, specifically the unsecured consumer lending piece. And you had the recent acquisition of GreenSky as well,” said Kush Goel, senior research analyst at Neuberger Berman, an investor in Goldman. “But I think that part is small in the grand scheme of things.”

The GreenSky deal was the largest purchase since Solomon took the helm at Goldman, which has also bought Dutch insurer NN Group’s investment management arm for about €1.6bn and investment adviser United Capital for $750m.

Solomon said he remains open to further deals “if there are opportunities to accelerate growth in the business inorganically we’ll consider them” but that “the bar will always be very high on acquisitions”.

Goldman has expanded into areas like consumer banking under its Marcus digital brand © Mike Segar/Reuters

A strong tailwind for Goldman under Solomon has been record earnings from dealmaking and trading activity, two areas that play to the lender’s traditional strengths.

Banks across Wall Street have benefited from these boom times. What the market is particularly appreciating is the fact that revenues, which are up 42 per cent in the first nine months of 2021, are rising faster than expenses, which have risen 7 per cent over the same period.

Line chart of Year-on-year change in per cent  showing Goldman's growth in revenue and expenses

“He can’t take credit for record industry capital markets revenue but he certainly can take credit for better than expected efficiency,” said Mike Mayo, banking analyst at Wells Fargo.

This efficiency is part of Solomon’s effort to make Goldman, with a market capitalisation of about $140bn, run more like a Fortune 50 company that has a more open dialogue with shareholders. He has also promoted a “One GS” approach to promote collaboration and cross-selling in Goldman’s different divisions and make the bank less siloed.

“David has instilled in the organisation in his first three years the preoccupation of the client. He’s bringing the firm back to first principles, which is that the client is first priority,” said Stephen Scherr, Goldman’s chief financial officer who is leaving the bank at the end of the year.

At Goldman’s Manhattan headquarters at 200 West Street, Solomon recently moved the executive team’s offices from the 41st floor, which is adorned by portraits of former Goldman leaders, down to the 12th floor. This overlooks a lobby level where staff congregate and grab coffee.

Bankers stopping by Goldman’s café can sometimes see Solomon at work in the conference room adjoining his office. They can also take a staircase up to the executive office suite where there is kombucha and cold brew on tap.

Taken with the more casual dress code Solomon introduced, it is all part of an effort to make the bank feel more modern.

Goldman, though, retains its relentless competitive edge. It has advised on more mergers and acquisitions globally than any other big bank while also winning more market share than peers so far in 2021, according to Refintiv league table data. In overall investment banking, Goldman places second in fees earned after JPMorgan.

Solomon’s style, however, has not been to everyone’s liking. Some internally gripe at a more centralised decision-making process which they feel is bureaucratic and runs counter to the freewheeling culture that marked its years as a partnership.

“Because they want to become a Fortune 500 company there are too many managers,” said one senior Goldman banker who recently left the firm.

David Solomon recently moved the executive team’s offices from the 41st floor of its New York headquarters to the 12th floor, which overlooks a lobby where staff congregate and grab coffee © Nina Westervelt/Bloomberg

Solomon argues the bank has become more entrepreneurial and innovative.

“What we’ve done is we try to improve our processes, because it actually gives us more of an ability to forcefully decide where to place investment,” he said.

While leading Goldman through the Covid-19 pandemic, Solomon also had to grapple with the issue of when to bring the bank’s 43,000 employees back to the office. In June, Goldman was the first of the big banks to mandate that staff start coming back into the office in parts of the US.

Some rival banks that have adopted a more relaxed approach are trying to make it a hiring advantage in Wall Street’s fierce war for talent.

Solomon feels the bank has generally “done a good job” in managing the return to the office.

“I’m sure you can find people that have complained, ‘Well they did this and they said this’,” Solomon said. “But look at where we are, you know, we have 50 to 60 per cent of our people in across the United States. We have higher participation back in the office in a place like London.”

Now three years into his tenure as chief executive, Solomon signalled he has little interest in becoming one of the “forever CEOs” that have dominated c-suites at some banks. Jamie Dimon, JPMorgan’s long-serving chief executive, for example, recently said he plans to stay at the bank “till the day I die”.

“I’m certainly not in the mode of saying I’ll be at Goldman Sachs until the day I die because hopefully I’m gonna live to a ripe old age,” Solomon said. “But at the moment I’m taking it one year at a time.”


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