Goldman Sachs and Deutsche Bank Have Something in Common

(Bloomberg Opinion) -- For the first time in more than two decades as a publicly traded company, Goldman Sachs Group Inc. laid out a detailed strategic vision and financial ambitions to investors. Corporate slogans aside, the big reveal is that Goldman will be playing catch-up for some time.

The Wall Street titan on Wednesday presented plans to add $5 billion of revenue and improve profitability by snapping up businesses, targeting a wider array of clients and cutting costs. Pivoting away from an over-reliance on a volatile, shrinking trading business will demand deft maneuvering. It made up 40% of revenue last year.

Chief Executive Officer David Solomon set out a trajectory to reach a return on tangible equity, a key measure of profitability, greater than 14% over the next three years. The target, a sliver of what Goldman made in its glory days, puts the bank closer in line with some peers, Morgan Stanley for example, but well behind JPMorgan Chase & Co. Higher returns are achievable over the longer term, but only once investments in new activities taper off.

“One Goldman Sachs,” as it now likes to call itself, is hoping it can improve lackluster profitability by doing what its rivals have already put into practice: serving consumers (it’s even planning checking accounts); managing money for the wealthy; alternative investments for third parties; and moving cash around for companies. In short, this once fearsome trading partnership is embracing bog-standard banking.

While small advances in these new fragmented markets might bolster revenue, Goldman is counting on building a successful brand in business lines that lie outside its core DNA. It will do this while expanding its investment banking franchise and trying to improve efficiency in trading. Each of these ambitions warrants caution.

To begin with, Goldman’s reputation has seen better days. It’s no coincidence that Solomon, just a few minutes after taking the stage, spoke of his laser focus on integrity and cited Bob Iger of Disney's flattering impression of Goldman. The 150-year-old bank, better known for putting its own interests above all else, is caught up in one of the biggest financial frauds of all time — the 1MDB scandal in Malaysia. Settlements with American and Malaysian authorities are still pending, a clear distraction for management and a red flag for some clients.

Tapping into consumer banking will add more recurring revenue and potentially $125 billion in deposits that will lower Goldman’s funding costs. But getting there may take substantial investment. Solomon promised that it won't take Goldman the 25 years it took to make money in Europe, or the 15 years it took in asset management; the consumer business, along with transaction banking, should break even from 2022 after losing $1 billion this year. But the bank’s foray into credit cards with Apple Inc. has already landed it in hot water with regulators after its algorithm allegedly discriminated against women.

In investment banking, Goldman wants to expand its leading franchise by targeting an extra 1,700 companies, mainly among smaller firms. Going down this mid-market path will see the bank competing in a crowded space, and will require a profound change in its world-domination mindset.

Acknowledging Goldman’s slowness in responding to client trends, its co-head of global markets, Jim Esposito, said the firm had placed too great a focus on returns per trade in the past. This will mean fewer structured dealings and more plain vanilla business and financings. Esposito isn’t counting on better markets or volatility to drive profit but he’ll need to cut $700 million in operating expenses to improve his unit’s return on equity from 7% to 10% in three years.

It’s a stretch to compare the still very profitable Goldman to Deutsche Bank AG; the German behemoth posted a 5.4 billion-euro ($6 billion) loss in 2019 as it sheds businesses. But Deutsche has shown how difficult it is for a former trading powerhouse to show the world it can adapt to the structural decline in its core business. The bank still relied on a surge in fixed-income in the fourth quarter to support revenue. Goldman faces a similar challenge.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

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