Targets to Get Investors Excited Again

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Goldman Sets Out New Targets to Get Investors Excited Again

  • Firm gives medium-term goal of more than 13% return on equity
  • Bank sees efficiency ratio improving to 60% in next few years

Goldman Sachs Group Inc.’s new leadership is looking to lure investors with a fresh promise of growth as Wall Street’s once dominant firm tries to regain its luster.

At its first-ever investor day, the bank set a goal for return on equity of more than 13% in the next three years as it plans to cut $1.3 billion in costs and rely more on consumer deposits to fund its business. The target is higher than the 11.5% Goldman posted in 2019, excluding litigation charges, and executives said the bank can reach “mid-teen” returns as its bets on transaction and retail banking start to pay off.

The firm is hoping greater transparency into its plans for growth will translate into more credit from investors. Morgan Stanley’s shares surged earlier this month after it raised profit targets.

Goldman has seen its standing on Wall Street slip over the past decade as the old engines that powered its rise sputtered in the wake of the financial crisis. To deliver on its new pledge, Goldman will need a resurgence of the trading division that reigned supreme a decade ago, even as the firm invests heavily in new businesses that will leave it looking more like its rivals.

Goldman’s transformation is being shepherded by a new management team that’s been in charge for a little over a year. That task has coincided with the departure of several senior leaders as the new chief executive officer, David Solomon, aims to make his mark on the company.

The bank said it’s also looking to produce higher than a 14% return on tangible equity, another closely watched measure of profitability, in the next three years. The goal compares with the 14% to 16% target that KBW analyst Brian Kleinhanzl was expecting. Two weeks ago, Morgan Stanley set a goal of 13% to 15% ROTE over the next two years.

Goldman Sachs also set a goal of a 60% efficiency ratio over the next three years as it plans to cut out some management layers and use artificial intelligence to reduce expenses. The target was more stringent than the 63% expected by Barclays Plc analyst Jason Goldberg.

Goldman shares fell 0.4% to $241.61 at 9:52 a.m. in New York, reversing earlier gains. The stock is up 7.5% since Solomon took the helm in October 2018, trailing Morgan Stanley’s 16% climb and JPMorgan Chase & Co’s 20% increase.

Some highlights from the firm’s new strategy:

  • Goldman says its interest expense will drop by $1 billion as it relies more on deposits instead of wholesale funding. ”We are embracing the bank model,” Chief Financial Officer Stephen Scherr said.
  • The bank’s forays into consumer and transaction banking will likely result in a $1 billion pretax loss in 2020, but will start producing profits by 2022 or 2023, according to Scherr’s presentation. Transaction banking — the business of moving money around the world for large companies — could deliver $1 billion in annual revenue five years down the line, the firm said.

The new targets point to a far different type of bank than when Goldman Sachs went public at the turn of the century. In the first decade after its initial public offering, the firm had a long-term goal of a 20% return on tangible equity, a subset of equity that excludes assets such as goodwill. It often exceeded that target, with profitability peaking in 2006, when return on equity was about 33%. Today that metric is about a third of that level.

Earlier this month, Goldman revamped the way it breaks down results by division to highlight growth in its consumer business. It created a consumer and wealth-management unit that houses the Marcus online lending business and Goldman’s credit-card venture with Apple Inc.

Goldman still awaits a final resolution to criminal probes examining its conduct in raising money for a Malaysian fund. Solomon previously oversaw the division that’s embroiled in the scandal. The bank could be on the hook for fines that run into the billion of dollars and has been negotiating a settlement that could include an admission of guilt by one of its units.

“I am personally laser-focused on” integrity following the incident, Solomon said Wednesday.


(Sources Bloomberg, Goldman Sachs Group Inc.)


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