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 On Tuesday morning, Goldman Chief Executive Lloyd Blankfein plans to
give a presentation that paints his bank as one that earns steadier
profits than peers, and delivers them through sundry business lines.
Those ideas run contrary to a common narrative on Wall Street about
Goldman Sachs: that it is good at earning money by trading and
investing its own capital, but little else.
"Most people will tell you Goldman makes almost all its money on
trading - I hear it all the time," said Rick Scott, who trades in
Goldman shares as chief investment officer at L&S Advisors, an
investment firm with $500 million in assets under management. "I
like that they're focused on doing one thing very well, but the more
diversified your business, the less there's a chance one area will
take a big bite out of your earnings when it's disrupted."
Goldman executives say the view that the bank is a one-trick pony is
misguided, and Blankfein's presentation on Tuesday is sprinkled with
factoids that run contrary to market perceptions.
One slide divides Goldman's trading unit into eight components, each
of which contributed 8 to 19 percent of revenue, on average, over
the past four years - showing that trading itself is more diverse
than it may seem. Another slide shows Goldman squeezed more revenue
out of businesses it kept than revenue it lost exiting others due to
new regulations.
"Despite operating in a more challenging revenue environment,
(Goldman Sachs) has continued to deliver best-in-class returns while
significantly growing our capital," the presentation says.
Even so, Goldman's biggest revenue contributor, bond trading, is in
the midst of a decline that's crimping profits across Wall Street.
Last year Goldman reported $8.5 billion in revenue from that
business, down 2 percent from 2013, and down 61 percent from its
peak of $21.9 billion in 2009.
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As that business has shrunk and capital requirements have gone up,
Goldman's return-on-equity has dropped to 11.2 percent, less than
one-third of its peak performance before the crisis. That metric is
important to shareholders because it shows how much profit a bank
can earn from their capital.
Blankfein and his deputies have refused to offer a return-on-equity
target, arguing that regulations are still too unclear. Analysts who
spoke to Reuters on Monday said some of their investor clients want
Goldman management to outline a specific plan for how the bank will
make up for falling bond revenue and drive returns higher.
"Goldman is saying, we have the right business model, but we're not
really sure what the business model's going to look like when all is
said and done," said CLSA analyst Mike Mayo. "You're going to lose
investors with that pitch."
(Reporting by Lauren Tara LaCapra; editing by Andrew Hay)
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