David Solomon’s early months as chief executive of Goldman Sachs have been long on rhetoric, as he promised to take digital disruption to the next level and rigorously review the firm’s existing business, all the while embracing a new era of transparency and introducing a millennial-friendly “casual everyday” dress code.
But for all the talk of future-proofing one of Wall Street’s most venerable institutions, the bank’s quarterly update on Monday failed to encourage investors looking for signs of Goldman’s strategic rebirth. Its shares fell nearly 4 per cent, bringing their decline since Mr Solomon took over in October to 11 per cent. That makes Goldman the worst performer of the big six US banks since he became chief executive.
“So far, there has been sound and fury . . . but little in terms of evidence (or progress) or recognition from investors,” said Wells Fargo banks analyst Mike Mayo, adding that Goldman’s price-to-book value of about 0.95 is “one of its lowest non-crisis valuations in history”.
Jason Goldberg, banks analyst at Barclays, said that while there had “definitely been progress” since Mr Solomon took over, there was “a lot more work that can be done”.
Here is Mr Solomon’s to-do list:
The master plan
The master plan to take Goldman to the next era has been the single biggest talking point among investors and analysts since Lloyd Blankfein’s 12-year reign as chief executive ended last year. Mr Solomon and his team promised a “front to back” review that would assess resource allocations and priorities across the business. An update was originally promised in “the spring” of 2019. On Monday, Goldman said the “comprehensive update” would come in the first quarter of 2020, while promising incremental progress reports before then. Many analysts were not pleased.
“Ultimately, we need to see his strategic plan and he needs to execute on it before we can really judge him,” said Christian Bolu, banks analyst with Autonomous, who believes Mr Solomon is “doing the right things (by) trying to move the business away from slow-growth legacy businesses to faster growing ones”.
Fixed income revamp
Fixed income trading was the problem child at Goldman when Mr Solomon took over. The bank posted its worst commodities year in 2017 and revenues in the fixed-income, currency and commodities division — known FICC — fell by a worse-than-peers 22 per cent between 2016 than 2018, triggering criticism that Goldman had failed to grasp secular changes in the business during the past few years.
Goldman’s FICC performance has improved relative to other Wall Street banks in the last two quarters, partly because of the bank’s low base. While Mr Solomon and his team have promised to reshape FICC for today’s opportunity, not the boom years of the past, concrete information on how this will happen has been scant.
On Monday’s earnings call, executives spoke of leveraging technology across the FICC business, cutting resources to underperforming segments and investing in more promising ones. “It’s still not clear,” said Mr Mayo, adding that while Goldman “rattled off about a dozen areas” for potential growth, he still did not know what they actually plan to do.
Mass market revolution
Just as former trading executive Mr Blankfein represented the face of Goldman in FICC’s heyday, Mr Solomon — an amateur disc jockey — became the embodiment of the bank’s mass market future. Goldman’s recent announcement of a credit card with Apple is a step in that journey, even though the financial impact of the tie-up is unclear. Mr Solomon also has plans to expand Marcus, Goldman’s online-only bank, and get deeper into managing money for wealthy Americans.
In investment banking, Mr Solomon has accelerated Goldman efforts to serve smaller corporate clients, announcing plans on Monday for a team of 100 investment bankers focusing on companies worth less than $2bn. Under Mr Solomon, Goldman is also pushing into the cash management business, an unglamorous business dominated by big commercial banks such as Citigroup, HSBC and JPMorgan Chase.
Investment banking rebound
Investment banking — and particularly the advisory end of the business where Mr Solomon built his career — has been a bright spot since he started. In the first quarter, Goldman grew advisory revenues by 51 per cent, to $900m, far better than the 12 per cent rise in advisory fees at rival JPMorgan’s in the same period. Goldman also stormed ahead of JPMorgan to clinch the number one spot for M&A and equity capital markets revenues in the year to date.
The 1MDB legacy
The fallout from Malaysia’s 1MDB money laundering and bribery scandal has hung heavily over Mr Solomon’s early months at the helm. The US Department of Justice is investigating the bank, and Malaysia is suing it for $7.5bn over Goldman’s role in helping the defunct state investment fund to raise $6.5bn, billions of which was looted. Mr Solomon on Monday said that while “nobody wants to get to a resolution on this faster than we do”, the bank did not know when the situation would be resolved.
Goldman did announce in February that it was withholding millions of dollars in payments to three former executives, including Mr Blankfein, “until more information is available” about the “ongoing government and regulatory investigations” into the 1MDB scandal. Goldman set aside a $516m for litigation and regulatory matters in the fourth quarter of 2018, the bulk of which are understood to relate to 1MDB.