Goldman Sachs chief executive David Solomon insisted the bank can persuade investors to place a higher value on its shares, although he warned that it could take time and the company to Wall Street will not always perform as strongly as it did in its last quarter of eruption.
In an interview with the Financial Times, Solomon declined to give a time frame to close the valuation gap relative to its mega-bank peers. He insisted, however, that the market would eventually reassess Goldman’s stock if it pursued a strategy of diversifying investment and trade banking and growing into more predictable businesses such as consumer banking and retail banking. asset management.
“I’m not focusing on what the time period will be. I just know that if we keep building the business and implementing our plan over time, the action and evaluation will take care of itself and we will be rewarded if we perform, ”Solomon said. .
Under Solomon, Goldman shares rose about 80% and recently hit an all-time high, benefiting from an unprecedented trading boom and stock market volatility during the coronavirus pandemic. However, it is still trading at around 1.5 times the bank’s book value, behind peers JPMorgan Chase and Morgan Stanley, which are trading nearly twice.
Solomon spoke to the FT after Goldman released third quarter results that put it on track for a record year, in large part thanks to its investment banking and trading units. Solomon said “Not every quarter will be as good as this quarter. But I think the business is in very, very good shape.
The stellar profits of securities trading and investment banking – ventures unpredictable over time – alone will not change investor perceptions of Goldman, which pivoted under Solomon to try and generate income streams. more solid.
Solomon, 59, a 22-year-old Goldman veteran who developed a mid-life passion for DJ-ing, this month marks three years as Managing Director of one of the world’s best-known banks. Prior to leading Goldman, Solomon ran his investment bank and was elevated to group co-chairman, sharing that job with Harvey Schwartz in a race for CEO succession.
His tenure so far has been marked by big profits, a pruning of senior bank executives grappling with the Covid-19 pandemic, and an effort to convince investors and regulators to see Goldman differently.
In the aftermath of the 2008 financial crisis, Goldman, under the leadership of Salomon’s predecessor Lloyd Blankfein, doubled its investments in investment banking and trading. The result was a stock price that stagnated as peers such as Morgan Stanley, Goldman’s longtime main rival, branched out into new businesses like wealth management, which promises the kind of income. stable fees that investors and stock analysts want.
Regulators also see trading as risky and are forcing Goldman to stricter capital requirements than its peers.
“They suffered a lot from the post-crisis period by remaining the same company in terms of strategy,” said Christian Bolu, banking analyst at Autonomous Research. “Goldman’s strategy has not been so decisive.”
Some of the bank’s initiatives started under Blankfein, but have been formalized and more clearly communicated to investors, as evidenced by Goldman last year which hosted its first Investor Day since going public in 1999.
The strategy articulated by Solomon is to increase market share in Goldman’s existing core businesses, investment banking and commerce, while expanding into four new areas: alternative third-party asset management; banking transactions; asset management; and personal banking services under its digital brand Marcus. These plans come with a cost reduction target of $ 1.7 billion by 2023.
To bolster the consumer push, Goldman last month agreed to buy online loan provider GreenSky for $ 2.2 billion. For some, the deal highlighted concerns about the amount of short-term, low-value loans Goldman has made through Marcus, which has made nearly $ 10 billion in loans altogether.
“I think the only area where I still hear concerns from people is Marcus, particularly unsecured consumer loan. And you also had the recent acquisition of GreenSky, ”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 biggest buy since Solomon took over as head of Goldman, which also bought the investment management arm of Dutch insurer NN Group for around 1.6 billion euros and the investment adviser. United Capital for $ 750 million.
Solomon said he remains open to other deals “if there are opportunities to accelerate the growth of the company in an inorganic way, we will consider them” but that “the bar will always be very high for acquisitions” .
A strong tailwind for Goldman under Solomon has been record profits from trading and trading, two areas that play on the lender’s traditional strengths.
Wall Street banks took advantage of this boom period. What the market particularly appreciates is the fact that revenue, which increased 42% in the first nine months of 2021, is growing faster than expenses, which increased 7% over the same period.
“He can’t take credit for the industry’s record capital markets earnings, but he can certainly take credit for better than expected efficiency,” said Mike Mayo, banking analyst at Wells Fargo .
This efficiency is part of Solomon’s efforts to make Goldman, with a market cap of around $ 140 billion, operate more like a Fortune 50 company that has a more open dialogue with shareholders. He also promoted a “One GS” approach to promote collaboration and cross-selling across different divisions of Goldman and make the bank less siled.
“David instilled customer concern into the organization in his first three years. It takes the company back to its first principles, which is that the customer is the first priority, ”said Stephen Scherr, CFO of Goldman 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, adorned with portraits of former Goldman executives, to the 12th floor. This opens onto a lobby level where the staff gather and have a coffee.
Bankers passing by the Goldman Cafe can sometimes see Solomon at work in the conference room adjoining his office. They can also take a flight of stairs to the executive office suite where there is kombucha and cold draft brew.
Considered along with the more casual dress code introduced by Salomon, this is all part of an effort to make the bank more modern.
Goldman, however, retains its relentless competitive advantage. She has advised more mergers and acquisitions globally than any other major bank while gaining more market share than her peers so far in 2021, according to data from the Refintiv leaderboard. In all investment banking services, Goldman ranks second in fees collected after JPMorgan.
Salomon’s style, however, was not to everyone’s liking. Some complain internally about a more centralized decision-making process which they consider bureaucratic and contrary to the freewheeling culture that marked its years of partnership.
“Because they want to be a Fortune 500 company, there are too many managers,” said a senior Goldman banker who recently left the company.
Solomon argues that the bank has become more entrepreneurial and innovative.
“What we have done is we are trying to improve our processes, because that actually gives us a greater ability to forcefully decide where to place the investment,” he said.
While leading Goldman through the Covid-19 pandemic, Solomon also had to grapple with the question of when to bring the bank’s 43,000 employees back to the office. In June, Goldman was the first of the major banks to require staff to begin returning to the office in parts of the United States.
Some rival banks that have taken a more relaxed approach are trying to make it an advantage to hire in Wall Street’s fierce war for talent.
Solomon believes that the bank has generally “done a good job” in handling the return to the office.
“I’m sure you can find people who have complained, ‘Well, they did this and they said this,” Solomon said. “But look where we’re at, you know, we have 50-60% of our employees across the United States. We have more involvement in the office in a place like London.
After three years as CEO, Solomon said he had little interest in becoming one of the “CEOs forever” who dominated the top executives of some banks. Jamie Dimon, longtime CEO of JPMorgan, for example, recently noted he plans to stay in the bank “until the day I die”.
“I am definitely not saying that I will be with Goldman Sachs until the day I die because I hope I will live to old age,” Solomon said. “But right now I’m taking it one year at a time. “