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Goldman Sachs pulls out of the mass market in search of higher valuation

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As David Solomon prepared to sell Goldman Sachs’ latest overhaul to investors on Tuesday, there were few signs from the sharp-tongued titan of the C-suite or the flamboyant “DJ D-Sol” often known for its music festivals. Instead, Solomon looked remorseful.

The second major restructuring since taking over as CEO four years ago was, in fact, the recognition that the bank was under pressure from investors who, after years of losses and high staff turnover, were increasingly skeptical of its ambitions to create a viable consumer brand.

“I appreciate the comment that shareholders are not excited about it,” Solomon said about the introduction to consumer banking during an interview with investors. “And that definitely influences some of our decision making.”

Describing the changes as an “evolution,” Solomon outlined plans to withdraw from retail banking and instead focus on traditional strengths that serve big corporations and wealthy investors, rather than serving Main Street customers. Goldman’s much-lauded Marcus consumer operation will be transformed into a unified asset and wealth management division.

Corporate rejigging also highlighted that Solomon has sought an answer that has infuriated Goldman since he took over, and possibly since the company went public: How can the firm persuade investors to put a higher value on a bank that many envy? Is it more dependent on, but highly unpredictable, revenue streams than its Wall Street counterparts?

“If everything is going perfectly, you don’t make changes,” said Autonomous Research banking analyst Christian Bolu. “So the fact that they’ve made some changes tells you that you need to adjust the initial expectations a bit.”

Goldman’s revamp will see it go from four divisions to three. Solomon merged his investment bank – the company’s crown – with the trading division, creating a unit that reminded some veterans of the old Goldman he was trying to pick. After separating asset and asset management in 2019, it is now bringing them back together.

The newly formed “Platform Solutions” business will combine the technology Goldman uses to support credit cards for Apple and General Motors, and the online lending business GreenSky, which it acquired this year.

“This is actually something we’ve been talking about and working on for the better part of a year,” Solomon told the Financial Times in an interview. “Given the way we’re set up – we’ve built very, very good digital platforms and products – we realized that it’s not important for us to be broad and go to a much broader set of leads.

Line chart of percentage of quarterly revenue from investment banking and trading, showing Goldman is putting more emphasis on trade and investment banking than its peers

Goldman’s retail banking expansion was a hit when it launched in 2016 under its previous CEO, Lloyd Blankfein, but that fanfare caused intense scrutiny among investors and the bank as losses and costs swelled.

Marcus has been successful as a low-cost funding mechanism for Goldman, accumulating more than $100 billion in client deposits. But instead of deepening its connections with retail clients, Goldman will now reintroduce the technology that underpins Marcus into its private wealth management business.

The market cheered the announced revision alongside third-quarter earnings that beat analysts’ expectations. Goldman’s shares trailed the broader market, up 2.3 percent on Tuesday.

Kush Goel, senior research analyst at Neuberger Berman, the investment manager who owns Goldman shares, said Goldman’s pullback from its “mass retail strategy” is what investors have been waiting for. “It shows that the management team is willing to reevaluate and reorganize.”

The question Solomon faces is whether his new structure will persuade investors to give his bank a higher valuation. Goldman is trading at just below book value, below its average of 1.05 over the past five years. By comparison, Morgan Stanley is trading at a five-year average of 1.32, about 1.4 times the book.

Price line chart to make multiple bookings showing Goldman's stock market lagging behind peers

The latest earnings showed how dependent Goldman is on investment banking and trading. Because of the unpredictability of these businesses, they are not so highly rewarded by investors who prefer recurring income from fee-based businesses like wealth management.

Investment banking and trading accounted for 65 percent of Goldman’s revenues in the third quarter. By comparison, last year the investment banking and commerce division generated 35 percent of revenues at JPMorgan and 44.8 percent at Morgan Stanley.

Some bankers who know Süleyman well say he is right to try to diversify, but question how much can be achieved with another restructuring.

“It just confuses the company,” said a former Goldman banker who worked with Solomon after he became CEO. They move the loungers but they don’t actually run the firm – they just move things into different buckets.”

In the past, Solomon has pointed to consumer banking as one of four growth areas that will diversify Goldman’s revenues. Attention will now shift to three other areas that will make the bank less dependent on deal making and trading: wealth management, wealth management and transaction banking.

Autonomous Research’s Bolu said investors were impressed with the fundraising in Goldman’s wealth management business, particularly alternative investments such as private equity, but “the jury is still out on growth initiatives.”

To oversee the three new divisions of Goldman, Solomon selected lieutenants from the current management team, all of whom would report to president John Waldron.

Dan Dees and Jim Esposito, who run the investment bank, and Ashok Varadhan, co-chairman of the business division, will lead the combined global banking and markets business. Stephanie Cohen, a close Solomon ally and most recently co-chair of Goldman’s soon-ending consumer and wealth management division, will lead the new Platform Solutions unit.

A big winner of the change seems to be Marc Nachmann, who has earned a reputation for focusing on costs with his work as Goldman’s trade division and co-leader of the investment bank. He will run the combined asset and asset management business. Julian Salisbury, formerly co-chairman of the independent wealth management division, will become chief investment officer of the asset and wealth business.

“Marc’s ‘fixer’,” one Goldman banker said. “Private wealth and wealth management is definitely about to experience what it’s like to work with Marc they haven’t experienced before.”

For Solomon, it’s a lot over whether this latest revision will succeed where the last one fell short. “Now, unfortunately for David, the clock is ticking,” said the Goldman banker.

Additional reporting by Brooke Masters