Tags: Goldman Sachs | Blankfein | Bank | Diverse

Goldman CEO Says Bank Is More Diverse Than it Looks

Tuesday, 10 February 2015 09:54 AM

Goldman Sachs Group Inc. is trying to convince investors its business model is more diverse than meets the eye.

On Tuesday morning, Chief Executive Officer Lloyd Blankfein made a presentation that sought to paint Goldman as a bank that earns steadier profits than peers through sundry business lines.

Those ideas run contrary to the common narrative on Wall Street that Goldman 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 at a financial services conference on Tuesday was sprinkled with factoids that run contrary to market perceptions.

One slide divides Goldman's trading unit into eight components that have each contributed 8 percent to 19 percent of revenue, on average, over the past four year, and showed that trading is more diverse than it may seem. Another slide showed that Goldman squeezed more revenue out of businesses it kept than revenue it lost after leaving others due to new regulations.

"We're 'breadthy' in capital markets. On the other hand we're very focused," Blankfein said. "We're breadthy in the context of the set of businesses we choose to be in."

Even so, Goldman's biggest contributor to revenues, bond trading, is in the midst of a decline that has crimped profits across Wall Street.

Last year Goldman reported $8.5 billion in revenue from that business, down 2 percent from 2013, and off 61 percent from its peak of $21.9 billion in 2009.

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 financial crisis. That metric is important to shareholders because it shows how much profit a bank can earn from its 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 this week said some of their investor clients want Goldman management to outline a specific plan for making up for falling bond revenue and driving 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."

© 2018 Thomson/Reuters. All rights reserved.

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Goldman Sachs Group Inc.is trying to convince investors its business model is more diverse than meets the eye.
Goldman Sachs, Blankfein, Bank, Diverse
Tuesday, 10 February 2015 09:54 AM
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