Like most of its peers, Goldman Sachs had suffered a close to 30% share price fall in the year to early December 2018. Yet Goldman has been performing well.
By October 2018, when it reported third-quarter numbers, the firm had generated $28.1 billion of revenues over the first nine months, the highest for eight years. It was running at a return on tangible common equity of 14.6%, 370 basis points higher than for the first nine months of 2017, and its highest annualized return in nine years. Diluted earnings per share over the first nine months were at an all-time record high.
But Goldman is now in transition, with a new chief executive, David Solomon, who came up through the investment banking side of the firm, taking over from Lloyd Blankfein, a trader who headed Goldman for 12 years – in its last glory days before the financial crisis and through the long and bitter aftermath.
The year ended with questions growing about the potential impact on Goldman’s business and financials from deepening investigations into the role of rogue ex-employees and others at the firm in the 1MBD scandal.
The new CFO is Stephen Scherr, a 25-year veteran of Goldman Sachs, who began his career in investment banking, spent time in fixed income, before most recently running consumer and commercial banking, including Marcus, which gathers retail deposits and offers unsecured personal loans.
Marcus is one of the longer-term growth drivers for Goldman, although some investors worry that it is expanding at a risky moment, late in the credit cycle.
“What encourages me when I look at performance in the first nine months of 2018 is not just 16% revenue growth across the firm but the fact that each business segment has seen revenues grow in double digit percentages,” Scherr tells Euromoney. “This firm has diversity. It also has operating leverage that allows us to self-fund today investments in platforms in new areas for us, such as consumer banking and corporate cash management, as well as on the traditional securities market side, that will help us to grow.
“You are right that there appears to be a dichotomy between top-tier operating performance and the stock price,” he adds. “That’s not unique to Goldman Sachs. We have a stalwart group of investors who believe in the strength, capability and agility of this firm, who are suffering through that stock price downturn. But over the long term, we aim to deliver to those shareholders the benefits from investments across the firm with more durable revenues and leading shareholder returns.”
In the short term, is the 1MDB scandal damaging the firm and causing potential clients to turn away?
“We are very attentive to that issue, but have yet to see meaningful impact to our business,” says Scherr. “On the asset management side of the firm, where there might be heightened sensitivity, and on the investment banking side, where corporate boards might take interest, we have engaged proactively. Our backlog of IPOs and advisory mandates has either stayed stable or picked up. In fact, we have won some hotly contested mandates recently, which will become public in 2019.”
In September 2017, the firm laid out ambitious plans to grow revenues by $5 billion by 2020. In November 2018, 14 months into a three-year plan, the firm reported it was already half way there.
“Those initiatives outline one path to near-term growth, but they do not mark the extent of our ambitions,” says Scherr, putting rivals on notice. “There have been areas where I have been hugely impressed by the speed of conversion, such as in investment banking for middle-market corporates. We have recruited senior investment bankers and moved some to cities such as Seattle, Atlanta, Dallas and Toronto to cover companies with which Goldman Sachs did not previously have relationships. Our bankers have already engaged with 80% of the 1,000 or so companies we targeted, and this year brought in $40 billion of deal volume from them, which we had thought might take far longer to achieve.”
The firm is looking to grow net interest income from increasing lending to these new middle-market corporate clients, mainly in the US, while cutting aggregate funding costs with retail deposits and, in future, operational deposits in a cash management business now being built.
But Scherr admits that winning new business is not always as straightforward as the firm had hoped.
“We have brought in approximately 70 private wealth managers and seen an excellent pick-up in flows of funds from high net-worth clients,” he says. “But this is not always easy. We have an excellent platform in GS Select that sits on the desk tops of regional brokers, through which we aim to extend more credit in margin loans to their clients. Onboarding has been more cumbersome than we thought, but we believe we have fixed that now and this area holds out promise.”
And watch out for the firm in cash management. It is building a new offering that it intends to roll out in late 2019 or 2020.
“We have not previously competed in that space traditionally dominated by the large commercial banks,” says Scherr. “But we see that the top-tier corporate clients our investment bankers cover spend as much on treasury and transaction services as on high-touch advisory and financing. We have access to those clients who report significant pain points in that service. We have set out to build a new digital platform service, which we believe will address the pain points, and we can deliver it profitably even at moderate market share.”