Goldman Sachs : Banks on Lending to Grow
By Liz Hoffman
Goldman Sachs Group Inc., acknowledging that its storied securities-trading business is unlikely to pick up enough to be a key revenue driver, is now looking to the lower-octane business of lending to spur growth.
The New York firm said Tuesday that loans to wealthy clients, companies and consumers would contribute almost half the $5 billion in revenue growth it is projecting by 2020.
The pronouncement represents a growing acceptance on Wall Street, voiced by other executives this week, that trading revenues, which have declined in the past five years, aren't likely to return to past peaks anytime soon.
Harvey Schwartz, a top lieutenant to Goldman Chief Executive Lloyd Blankfein, on Tuesday said persistently low volatility in financial markets meant that the third quarter would be a "challenging" one in terms of trading. J.P. Morgan Chase & Co. CEO James Dimon and executives at Citigroup Inc. and Bank of America Corp. projected trading declines of between 15% and 20% for the quarter.
Traders had hoped that an uptick in activity in late 2016 after President Donald Trump's election was a harbinger of better times, but now it looks increasingly like a blip. In recent months, optimism about a surging economy and rising interest rates has surrendered to worries about sluggish growth and low inflation. That is likely to keep a lid on rates and trading.
An environment of slow but steady growth and low rates has allowed markets to calmly rise. But there isn't enough trading activity to stoke growth at banks like Goldman. After nearly a decade of stagnation and cost cuts following the 2008 financial crisis, Goldman is gearing up to play offense, but it plans to rely less on trading than it had in the past.
Goldman on Tuesday laid out a detailed plan to grow revenue, which has remained flat since the financial crisis. Its target of $5 billion in new revenue by 2020 hinges on businesses that have been footnotes for most of the firm's 147-year history: lending, asset management and tending to the mundane needs of corporate clients and money managers.
The goals outlined by Mr. Schwartz would bring Goldman back to 2006 revenue levels. In other words, the firm is shooting by 2020 to have spent more than a decade treading water.
Lending to wealthy clients, companies and consumers could add $2 billion of new revenue over the next three years, said Mr. Schwartz at a global financial-services conference hosted by Barclays PLC. That is twice what a revamp of Goldman's vaunted bond-trading business could produce, he added.
"We're focused on the future," said Mr. Schwartz, Goldman's co-chief operating officer. "And when I say focused, I mean completely obsessed."
Investors cheered the plan, which was unusually detailed for a firm known for keeping its intentions close to the vest. Shares rose 2.2%.
Goldman has leaned on cost cuts, rather than revenue growth, to boost profit margins since the crisis. So have other banks, a trend that has sent Wall Street into a funk from which it has proven difficult to emerge. Gone are the bonus pools that often afforded Goldman employees the biggest bragging rights.
The cuts have put Goldman in a position to squeeze higher profits from extra revenue. Mr. Schwartz said as much as half of every extra revenue dollar from now on could end up on the bottom line.
"Our relative performance, in the long run, is totally within our control," Goldman CEO Mr. Blankfein said in a voice mail Tuesday to the company's 34,000 employees.
The biggest opportunity lies in lending, which Goldman once eschewed but more recently has embraced. The firm plans to put $28 billion more toward loans over the next three years, which would increase its loan portfolio by 40%.
Much of that, some $12 billion, will go toward the online consumer bank Goldman launched last year. It casts Goldman as a Main Street lender, but without physical branches, taking small deposits from individual savers and lending them back out.
Goldman is looking for new ways to lend, weighing secured loans such as mortgages as well as e-commerce loans offered to customers online, according to people familiar with the discussions. It recently partnered with Fidelity Investments to fund loans backed by household brokerage accounts.
Some analysts question whether Goldman can deliver on projections in areas it has only recently focused on. "We are somewhat skeptical," Keefe, Bruyette & Woods analysts wrote in a note. The firm is looking for growth "outside of [its] traditional strengths."
Trading revenues have stalled at most big Wall Street firms, and what remains is simpler, electronic and with lower fees.
The five biggest banks as a group saw trading revenue dip 12% in the second quarter. Volatility remains near record lows, despite worrying geopolitical headlines. Many investors are waiting for clarity on how soon and how quickly interest rates will rise.
What's more, many assets are trading within narrow price bands, meaning it is hard for brokers to make much money standing between buyers and sellers.
J.P. Morgan's Mr. Dimon predicted that busy markets will return. "You will have volatile markets again," he said. "People will panic, you will panic, running through the door like everybody else."
Mr. Dimon said he may stop giving trading guidance because investors are too focused on near-term results. Earlier this summer, he chastised reporters on a press call for seeking intraquarter details about trading revenue.
Emily Glazer contributed to this article.
Write to Liz Hoffman at [email protected]