New York: Goldman Sachs Group Inc’s GS.N trading division was caught “wrongfooted” last year, bracing for a return of volatility that did not materialise on financial markets, Chief Executive Officer Lloyd Blankfein said on Tuesday.
The trading division also was overdependent on one certain client base that became less active, Blankfein said, although he did not specify which client base that was.
“I would say, we, last year, braced for a return of volatility and it didn’t come out,” Blankfein told investors. This and the lack of activity from the client base caught Goldman in a “double whammy,” he said, and the firm is making adjustments.
He said the outlook has improved due to factors including a recent rally in oil prices LCOc1 and a break out in 10-year bonds.
Speaking at an industry conference in Miami Beach, Blankfein also gave an update on the Wall Street firm’s ambitious $5 billion revenue plan that was met with scepticism when it was unveiled in September. Investors also were keen to hear updates on Goldman’s ailing bond trading unit.
As part of its growth plans, the firm has set up a joint venture between its market-making and investment banking teams to provide better financing and hedging services. He said this has resulted in 16 new commodity-related transactions already.
Blankfein said Goldman is also seeking to engage more with certain large asset managers, banks and corporate clients to broaden its coverage.
It was the first time Blankfein himself gave investors a formal, public presentation about Goldman’s lofty goals. Since his deputies first laid out the revenue-growth strategy in September, analysts have questioned the underlying assumptions and cited concerns raised by investors.
In October, Instinet analyst Steven Chubak told Goldman’s finance chief that clients wanted to know why the firm thinks it can boost investment management revenue by $1 billion, given the challenges money managers face. In a recent report, Evercore ISI analyst Glenn Schorr said shareholders remained “sceptical” about consumer lending and other components of Goldman’s revenue growth plan, despite assurances from senior executives.
Wall Street was hesitant to forecast that Goldman can generate the promised $5 billion, Wells Fargo analyst Mike Mayo said in an interview.
“This is the environment that Goldman has been waiting for all decade,” said Mayo, who expects the bank to achieve $3 billion of its $5 billion target helped by volatility returning to stock and bond markets globally.
“If Goldman doesn’t get it right in 2018, then management has some serious questions to ask.”
Trading had been a profit engine for Goldman Sachs for the decade leading into the 2007-2009 financial crisis. Those profits dried up due to lethargic markets, new regulations and tougher competition.
In 2009, Goldman boasted 19 percent market share in bond trading, which generated $121 billion in revenue across Wall Street, according to the bank’s September presentation. But Goldman since lost nearly half that share as the revenue pool has declined by nearly half. Last year the bank reported its worst bond trading results since 2008, with revenue dropping 30 percent.
In investment banking, Goldman is looking to grow its coverage universe by 1,000 clients, focusing on both private and public companies where there is room to build a relationship. It is also starting to develop significant operations in Main Street banking.
Goldman launched its digital consumer bank Marcus in 2016, primarily targeting credit-card borrowers who want to refinance into cheaper loans. By the end of last year, Marcus had originated $2.3 billion in loans, and management expects to grow that figure by $13 billion through 2020.
Some investors and analysts have expressed concern about growth in this area due to signs that consumer credit risk is on the rise, particularly in cards.
Goldman said it has over 350,000 customers across loans and deposits, saying there are opportunities to add other products to their platform over time.
Blankfein added that within its consumer business, there were longer term opportunities to grow in wealth management and retirement products.
The presentation itself was a step toward more transparency for Goldman, which has historically disclosed little about its strategy and declined to issue financial targets the way rivals like Morgan Stanley MS.N routinely do.
“Over the last many years, Goldman has been very shy about what it’s going to do, so you never had a full score card to measure against,” said Barclays analyst Jason Goldberg. “This is a very different Goldman Sachs today than it was 20-30 years ago.”