Goldman Sachs doesn’t want to be everyone’s bank, but it has to be someone’s

Some investors welcomed the withdrawal of consumers from Goldman, having never really bought into the idea that the legendary titan of Wall Street could become a Main Street-friendly brand. Investors these days want to own stocks in banks they can put away in their portfolios and forget about — banks that have mastered the rudimentary job of depositing and lending.

Goldman, with its background in the burgeoning business of investment banking and trading, never quite fit the mold. He struggled to grow his credit card business following a resounding deal with Apple Inc.

Billions of dollars in consumer deposits have not been used profitably enough. A long-awaited consumer checking account never materialized.

The effort racked up billions of dollars in losses — a rarity for a company accustomed to winning more contracts than it loses.

Yet Goldman can no longer return home. The archetypal Wall Street trading powerhouse and investment bank – known as the vampire squid by Rolling Stone more than a decade ago – no longer exists. This is partly due to post-crisis regulations such as the Volcker Rule, which prohibited banks from betting their own money on proprietary or “incidental” transactions.

Goldman emerged from the financial crisis and transformed itself into an unremarkable depository bank, a status that regulators have insisted on in order to be able to access emergency funds from the Federal Reserve. He’s spent the last 15 years trying to figure out how to be one.

Now Mr. Solomon’s task is to convince investors that Goldman can thrive without becoming an all-comers’ bank like JPMorgan Chase & Co. or Bank of America. Corp.

The challenge: to generate more of the stable and recurring income that banking investors dream of.

“Our asset and wealth management platform is the primary driver of growth,” Solomon said.

The back and forth of Goldman’s post-financial crisis strategy has a long history. Initially, Goldman didn’t want to become a major retail or commercial bank, but executives began to consider a change when its trading revenue declined. A banking push meant collecting deposits from account holders, which provide more stable, low-cost funding for the bank that is not subject to market fluctuations. Previously, it had funded itself using high-risk assets as collateral.

After all, cheap deposits and lucrative credit card loans helped JPMorgan and Bank of America achieve much better shareholder returns between 2012 and 2020.

“We are a bank. It’s not a guess,” then-CEO Lloyd Blankfein said in a 2012 interview with The Wall Street Journal. Goldman “leaned on a great opportunity”.

The move to a more regulated bank holding company boosted Goldman shares, which doubled in 2009 after hitting a low closing price of $52 in November 2008. Goldman’s share price now trades above $350. dollars per share.

Yet Goldman’s return on equity, or the profit it made on its capital, has stagnated. It fell from 30% in the north in 2007 to around 11% in 2012, 2013 and 2014.

So it made perfect sense that Goldman would finally try to build its bank. He added private banking to wealthy clients. It expanded to mainstream consumers in 2016 with high-yield online savings accounts, then expanded to Marcus-branded loans (the first name of a company founder) and credit cards. through partnerships with Apple and General Motors..

He acquired a company called GreenSky, which specializes in giving loans to people to carry out home improvement projects. It was planned to offer checking accounts, the cornerstone of the bank.

But the sum total of those efforts did not translate to substantially higher returns or valuation for Goldman shares.

When the pandemic hit, supply chain issues and rising prices fueled a surge in commodity trading. Actions taken by the Federal Reserve to fight inflation have reinvigorated moribund interest rate trading activity. The end of free money made funding commercial customers more difficult, but also quite lucrative for remaining players.

All of this sparked a trading renaissance and Goldman surged. Although its consumer banking effort had received much more attention in the public eye, Goldman had also for years refocused its Wall Street activities around Wall Street’s largest accounts and offered clients direct access to a portion of the “secret sauce” behind his business prowess. . This means that it allowed them to make more use of its internal tools, such as powerful databases that analyze markets and manage risk. It had considerably developed its activity of financing its customers.

Business leaders, meanwhile, flooded the market with bids and bids for stocks. Goldman’s investment banking revenue surged in 2021, pushing the bank to more than 20% return on equity for the first time in more than a decade.

Even a down year for closing deals last year was offset by another strong year for the bank’s business operations. The two companies together produced a combined return on equity above 16% in 2022, compared to less than 9% in 2019.

The result is that Goldman now has a banking and markets unit that may never generate the outsized profits that pre-Volcker rule “accessory” trading desks did. But the trade-off is that the unit can be more stable and less risky.

With that as a backdrop, there may be less urgency for Goldman to turn to retail banking to deliver the kind of predictable returns shareholders want. Goldman’s stock has significantly outperformed the S&P 500, as well as JPMorgan and Bank of America, since the start of 2020.

Yet Goldman falls short on at least one benchmark: its lackluster performance relative to Morgan Stanley..

Morgan Stanley’s evolution over the years hasn’t caught Goldman’s attention, but its own wealth management push has helped the company build a huge business with stable management fees. Morgan Stanley acquired consumer trading platform E*Trade just before the retail trading boom. Morgan Stanley shares have had a total return of over 110% since the start of 2020, compared to over 65% for Goldman.

To bridge this gap, Goldman again has to reckon with being a bank. Instead of looking to Main Street or just looking at Wall Street, Goldman is looking somewhere in the middle — the stewards of America’s retirement money, pensions, insurance funds, and college endowments, as well as the wealthy. and the haves. Its greatest growth plan is now with its asset and wealth management business.

It sells its main high-risk, high-return investments in so-called alternative assets, such as stakes in private companies. This will free up more of his capital to redeploy to potentially less lucrative but much more stable things like lending. Moreover, making these same types of alternative investments but with clients’ money is a route to stable management fees that investors value very highly. Goldman’s assets and wealth unit generated about $8.8 billion in management fees last year. The goal is to reach 10 billion dollars.

If the bank ends up making fewer loans to average consumers, it can market more loans to its wealthier retail customers. Only about 30% of its US private customers currently borrow from the bank. It could use its deposits to fund more lending and financing to institutional and Wall Street clients, which have always been the territory of JPMorgan or Bank of America. Goldman is also building a transaction banking business, which involves day-to-day management of bank accounts and corporate payments, for large corporations such as American Airlines Group. Inc.

Investors may feel like their money has been mis-spent on personal banking mishaps. But if Goldman is now ready to finally answer the question “what is a bank” firmly, then this has been a useful identity crisis.

Write to Telis Demos at Telis.Demos@wsj.com