Investors have been waiting for Goldman Sachs Group Inc.’s strategy to turn around its fixed-income trading operation. What overshadowed that Tuesday was a plan to expand in a business that until now has been mostly a sideline.
Lending to wealthy clients and consumers through an online bank, as well as other loans, could bring in $2 billion of new revenue over the next three years, twice as much as a revamp of the firm’s storied bond-trading business, Co-President Harvey Schwartz said in a presentation.
The strategy for growth, which follows years of cutting senior staff, compensation and risk-weighted assets, could boost return on equity 1.5 percentage points over three years, the company said. Schwartz, one of Chief Executive Officer Lloyd Blankfein’s top lieutenants, addressed investors demanding answers after trading suffered the worst first half of the CEO’s 11-year tenure.
“We are somewhat skeptical,” Keefe, Bruyette and Woods analysts wrote in a note. The strategy “is focused on penetrating new markets or client segments outside of the company’s traditional strengths.”
Fixed-income trading can bring in $1 billion more in revenue over the next three years through a mix of adding talent, financing client trades and doing more with asset managers, banks and corporations, New York-based Goldman Sachs said.
The emphasis on lending dominated the revenue projections, even as Schwartz acknowledged that it’s late in the credit cycle and the market is mispricing some types of loans. Wells Fargo & Co. said Tuesday it’s making fewer auto loans and staying away from some types of commercial and real estate lending because the environment is becoming overheated.
“It’s certainly not lost on us, where we may be in the credit cycle,” Schwartz said.
Among the areas Schwartz highlighted for the next three years was an estimated $12 billion in growth from the firm’s Marcus lending platform, which will originate about $2 billion in loans by the end of 2017. The bank said it can bring in an additional $500 million in revenue from making $5 billion in loans in areas such as the middle market, real estate, alternative energy and structured credit.
In August, Goldman Sachs said it plans to start a digital-only business next year in the U.K. that takes deposits.
The new revenue figures shouldn’t be viewed as targets, and don’t assume any improvement in the market, economic or policy-making environment, Schwartz said. If conditions worsen, the bank will adjust, he said.
“If operating conditions improve, I have no doubt we can exceed the revenue potential presented today,” Blankfein said in a voicemail to the firm Tuesday.
Shares of the company advanced 2.1 percent to $225.77 at 10:30 a.m. in New York, the third-best performance on the 67-company S&P 500 Financials Index.
Schwartz expressed optimism that the trading environment would eventually improve, though he said that’s unlikely in the third quarter. The fixed-income business remains “pretty challenging,” with this quarter’s activity much the same as during the first half of the year, he said.
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Goldman Sachs doubled lateral hires in its fixed-income, currencies and commodities business in the first six months of 2017.
Schwartz also said Goldman Sachs isn’t among the top three trading partners for roughly 600 of its clients. That’s “not only unacceptable, it’s also a great opportunity,” he said.
The bank has lost ground to rivals including JPMorgan Chase & Co. and Citigroup Inc., which have larger lending footprints. In prior presentations and interviews over recent months, executives have preached improving cooperation among trading desks, relieving clients from some fees and reducing a reliance on hedge funds as keys to boosting performance.
Pablo Salame, the firm’s co-head of trading, has implored traders this year to look for ways to reward favorite customers with free add-ons, coining the slogan “Just Add Butter” in a nod to restaurant-industry practice. Too often, top clients are confronted with a tangle of fees from disparate desks that don’t work together, or they’re snubbed by a misguided trader who may think a transaction is too small, he told employees in April.
“Our relative performance, in the long run, is totally within our control,” Blankfein said in the voicemail Tuesday. “We have the people, the client franchise and the drive and I’m excited to show our shareholders and our clients what we’re capable of.”