Goldman Sachs on Thursday lifted a key profitability target as the Wall Street investment bank redoubles efforts to close the valuation gap that has opened up with rival banks.
Bridging the gap in Goldman’s stock price relative to rivals such as Morgan Stanley is one of the central challenges for David Solomon, the bank’s chief executive since 2018.
In a slide presentation, Solomon said Goldman was aiming for a return on average tangible common equity (Rote), a key measure of profitability, of 15 to 17 per cent over the next three years, up from a previous target of more than 14 per cent.
“We’re focused on doing the right thing and I know that the market rewards performance over time,” Solomon said in an interview with the Financial Times.
Solomon gave the new targets in a 40-minute presentation at a conference organised by Credit Suisse, with the succinct presentation in stark contrast to the bank’s investor event in January 2020, when Solomon and his team presented to investors for more than six hours.
Solomon said there was “a lot of scepticism” about the bank’s 2020 targets and its ability to meet them, a feeling he blamed on Goldman’s record of secrecy around the bank.
“We’re talking about scepticism because Goldman Sachs has not been a transparent organisation. We haven’t had investor days, we haven’t put targets out,” Solomon told the FT.
The new Rote target is roughly in line with what some analysts were anticipating. Analysts at Jefferies earlier this week said in a note they expected Goldman to give a target of more than 15 per cent.
By comparison, Morgan Stanley last month told investors it was targeting a Rote of at least 20 per cent over the “longer term”, without giving a more precise timeframe. JPMorgan Chase has set itself a “medium-term” Rote target for upwards of 17 per cent but warned last month it would probably miss this goal in 2022.
Goldman shares were down 2 per cent in morning trade in New York, roughly in line with the fall in the broader US banking index.
Goldman’s new Rote target is below the 24.3 per cent it reported last year on the back of record profits from Goldman’s traditional cornerstone investment banking and trading divisions.
Last year’s blockbuster earnings are not seen as sustainable as the Federal Reserve tightens its monetary policy in 2022.
But Solomon is betting that market share gains in those traditional businesses as well as an expansion in newer areas, like alternative asset management and consumer banking, will be stable enough to guarantee more durable profitability.
“The combination of those activities is lifting our returns and giving us more confidence and our ability to say that these are return targets that we can live up to,” Solomon told the FT.
Among its other new targets, Goldman said it was aiming to increase revenues at its consumer business, under the brand name Marcus, from $1.5bn in 2021 to more than $4bn by 2024.
In asset management, the bank is targeting fees of more than $10bn in 2024, of which more than $2bn should be from so-called alternatives such as private equity and real estate.