Goldman Sachs Embarks on a Long Evolutionary Path

(Bloomberg Opinion) -- There was nothing spectacular in Goldman Sachs Group Inc.’s first-quarter earnings. For Chief Executive Officer David Solomon, muddling through for now might just be the price to pay for his long-term vision.

In what was widely expected to be a tough three-month stretch, and certainly worse than the same period in 2018, the bank slightly exceeded a low bar for revenue from fixed-income, currencies and commodities trading, equity underwriting, investment banking and financial advisory services, while narrowly missing on equities sales and trading and debt underwriting. Effectively, it was a mixed bag.

Solomon said he was “pleased with our performance in the first quarter, especially in the context of a muted start to the year.” In a conference call, he attributed the sluggishness to a slowdown in initial public offerings and dampened market volatility. The bank also flagged a “decline in leveraged finance transactions.” 

The question, naturally, is whether those businesses will gain momentum in the months ahead. At first glance, the prospects are promising. In Europe, April has already experienced the highest value of traded IPOs since last October as the market starts bubbling again. More specifically to Goldman, the bank will be helping Uber Technologies Inc. go public in an expecting listing next month, which should buoy its second quarter. As for leveraged loans, prices have largely rebounded from their lows at the end of 2018, even though the floating interest rates are no longer as compelling with the Federal Reserve holding off on further policy tightening. 

Still, it’s hard to be too sure of anything in late-cycle financial markets, which could prove fickle as they did at the end of 2018. Perhaps that’s why Goldman shares fell as much as 3.2 percent after U.S. equity markets opened, compared with a gain of about 1 percent before the earnings announcement. 

Goldman, of course, doesn’t want to be so reliant on the market’s whims. Solomon said the firm is “focused on new opportunities to grow and diversify our business mix.” That includes initiatives like Marcus, its online service that offers personal loans and savings accounts with interest rates well above the average of brick-and-mortar competitors, and Marquee, a trading and risk-management platform that lets clients “make faster decisions on a bigger scale.” Goldman also partnered with Apple Inc. on the technology giant’s new credit card, introduced last month. Solomon emphasized he wants to “increase the durability of our revenues.”

In perhaps the most notable line in his opening comments, Solomon said the bank is “on an evolutionary path.” 

That’s an aspirational thought, but it’s clearly not going to happen overnight. Not for Goldman. And it might never reach a similar balance as its competitors. Trading accounted for more than 41 percent of the bank’s $8.81 billion in net revenue in the first quarter. That’s not far off from the 43.7 percent share a year ago, and it’s more indicative of its current business model than when trading revenue fell to 30 percent of the total in the last three months of 2018.

That market dependence works during a quarter when the S&P 500 Index rose more than 13 percent, corporate bond spreads tightened and even Treasuries rallied. Institutional clients became “less cautious” in March, Solomon said, seemingly a signal that markets would be wide open throughout the second quarter. 

If that sort of market exuberance does come to pass, Goldman will most likely post stronger results in the next go-around. If not, it may scrape by yet again. But if that’s the cost of being “disruptive” and “an innovator,” Solomon and the bank’s leadership appear willing to ride the short-term ups and downs.

On Wednesday, April 17 at 11 am New York time, Bloomberg News will roll out Authers' Note, its first Book Club live blog. Bloomberg Senior Editor John Authers, Bloomberg Markets Magazine Editor Christine Harper and Wall Street Journal Columnist Jason Zweig will be discussing Capital Ideas: The Improbable Origins of Modern Wall Street by Peter Bernstein. Bloomberg clients will be able to interact by sending questions and comments to authersnotes@bloomberg.net and follow the event on TLIV .

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

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

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

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