As the Wall Street trading bonanza fades, so does shareholders’ love of Goldman Sachs.
Since the start of the year, shares in the Wall Street investment bank have fallen 11 per cent, even as the KBW Bank index has gained 3 per cent. Worse, the valuation gap with rival Morgan Stanley, which had narrowed last year, has opened up again.
David Solomon had his chance to woo back investors on Thursday. In a wide-ranging presentation, Solomon set a new three-year return on tangible equity (ROTE) goal of 15 to 17 per cent, up from a previous target of at least 14 per cent.
But rather than reassure, the new target, which is well below the 24.3 per cent delivered in 2021, just confirms any concerns that last year’s exceptional market conditions will not be repeated any time soon.
Compare the new Goldman objective with that of rival Morgan Stanley, promising a ROTE of at least 20 per cent, or even with JPMorgan’s 17 per cent goal. Those differences justify Goldman’s lower earnings and book multiples.
Investors in financial services prize recurring revenues. This explains why Morgan Stanley, with its robust wealth management and investment management businesses, trades at 1.9 times price to book ratio. At Goldman, its more volatile trading and investment banking units made up more than two-thirds of its revenue last year. Its rating is just 1.2 times book and 9 times forward earnings, also well below its rival.
Buying European asset manager NN Investment Partners and buy now, pay later fintech GreenSky last year underscores Solomon’s efforts to build more sustainable revenue flows.
More importantly, Goldman promises to lift revenues at its Marcus consumer business from $ 1.5bn in 2021 to more than $ 4bn by 2024. In asset and wealth management, it expects fees of more than $ 10bn in 2024.
These are ambitious goals. Combined, they would account for 28 percent of Goldman’s 2024 revenue. However, these are crowded and competitive sectors. Expect more spending to expand these businesses – at the expense of share buybacks. Investor skepticism is well deserved.