David Solomon, Goldman’s boss, says the bank could close the valuation gap with rivals

Goldman Sachs CEO David Solomon said the bank could persuade investors to put a higher value on its shares, although he warned it might take some time and the Wall Street firm will not always perform as well as it did in the last quarter.

In an interview with the Financial Times, Solomon declined to provide a timeframe for closing the valuation gap with its mega-banking competitors. However, he insisted that the market would eventually overvaluate Goldman stock if it pursued a diversification strategy from investment banking and trading and growth in more predictable industries such as consumer banking and asset management.

“I don’t focus on what the period of time will be. I just know that if we continue to grow the business and implement our plan over time, the stocks and valuation will work on their own, and we will be rewarded if we achieve results, ”said Solomon.

Under Solomon, Goldman stock rose by about 80 percent and recently hit an all-time high, benefiting from an unprecedented boom in trading and stock market volatility during the coronavirus pandemic. However, it is still trading at around 1.5 times the bank’s book value, lagging behind JPMorgan Chase and Morgan Stanley, which almost double.

Solomon spoke to FT after Goldman released its third-quarter results which enabled it to hit a record year, driven largely by investment banking and trading efforts. Solomon said, “Not every quarter will be as good as this one. But I think the company is in really good shape. “

Stellar profits from stock trading and investment banking – businesses that are unpredictable over time – will not by themselves alter the perception of Goldman by investors, who under Solomon inclined to generate more stable revenue streams.

Solomon, 59, a 22-year-old Goldman veteran who developed a passion for DJingThis month marks three years as the CEO of one of the most famous banks in the world. Prior to running Goldman, Solomon headed his investment bank and was promoted to co-chair of the group, sharing that job with Harvey Schwartz in the CEO succession race.

His tenure so far has been marked by high profits, slashing the bank’s senior ranks, fighting the Covid-19 pandemic, and trying to convince investors and regulators to view Goldman differently.

Solomon, a 22-year-old Goldman veteran who developed his passion for DJing in middle age, is three years this month as CEO of one of the world’s most famous banks © Trevor Hunnicutt / Reuters

In the wake of the 2008 financial crisis, Goldman doubled in investment banking and trading under Solomon’s predecessor Lloyd Blankfein. As a result, the stock price has remained stagnant as peers such as Morgan Stanley, Goldman’s long-standing rival, have branched into new businesses such as wealth management that promises the stable, fee-based returns investors and stock analysts expect .

Regulators also consider trading to be risky and therefore impose more stringent capital requirements on Goldman than its counterparts.

“They have suffered a lot in the post-crisis period and remain the same company in terms of strategy,” said Christian Bolu, banking analyst at Autonomous Research. “Goldman’s strategy was not that decisive.”

Some of the bank’s initiatives started with Blankfein but were formalized and communicated more clearly to investors, as evidenced by Goldman last year, which held its first investor day since it went public in 1999.

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The strategy outlined by Solomon is to expand market share in Goldman’s existing core business and investment banking and trading business while expanding the business to four newer areas: Third Party Alternative Asset Management; transactional banking; property management; and consumer banking under the digital brand Marcus. These plans are accompanied by a goal of reducing costs by $ 1.7 billion by 2023.

To bolster consumer pressure, Goldman last month agreed to buy online loan provider GreenSky for $ 2.2 billion. For some, the deal highlighted concerns about the amount of short-term small loans that Goldman made through Marcus, who had a combined total of nearly $ 10 billion in loans.

“I think the only area where I still hear some concerns from people is Marcus, namely the unsecured consumer loan. There was also the recent acquisition of GreenSky, said Kush Goel, senior research analyst at Neuberger Berman, an investor in Goldman. “But I think this part is small in the grand scheme of things.”

The deal with GreenSky was the largest purchase since Solomon took the helm of Goldman, which also bought the investment management arm of Dutch insurer NN Group for around € 1.6 billion and investment advisor United Capital for $ 750 million.

Solomon said he remains open to further deals, “if there are opportunities to accelerate growth in business inorganic, we will consider them,” but “the bar for acquisitions will always be very high.”

Marcus app
Goldman expanded into areas such as consumer banking under its digital brand Marcus © Mike Segar / Reuters

A strong impetus for Goldman under Solomon came from record profits from transactions and trading activities, two areas that play on the lender’s traditional strengths.

Wall Street’s banks benefited from these boom times. The market is particularly appreciative of the fact that revenues, which increased by 42% in the first nine months of 2021, are growing faster than expenditure, which increased by 7% over the same period.

Line chart showing the year-over-year percentage change showing the increase in Goldman's revenues and expenses

“It cannot take credit for record industry revenues, but it can certainly take credit for better-than-expected performance,” said Mike Mayo, bank analyst at Wells Fargo.

This efficiency is part of Solomon’s efforts to make Goldman, with a market capitalization of around $ 140 billion, act more like a Fortune 50 company that engages in a more open dialogue with shareholders. He also promoted the “One GS” approach to promote collaboration and cross-selling across Goldman’s branches and reduce bank congestion.

“David instilled in the organization in the first three years of customer care. It brings the company back to the first principles which means the customer comes first, ”said Stephen Scherr, Goldman’s chief financial officer, who leaves the bank at the end of the year.

At Goldman’s Manhattan headquarters at 200 West Street, Solomon recently moved the offices of the executive team from the 41st floor, decorated with portraits of Goldman’s former leaders, to the 12th floor. It overlooks the lobby level where employees gather and drink coffee.

Bankers staying at Goldman’s coffee shop may occasionally see Solomon working in the conference room adjacent to his office. They can also go upstairs to the office, where there is kombucha and barrel cold brew.

Given the more casual dress code introduced by Solomon, it’s all part of an effort to make the bank feel more modern.

Goldman, however, retains its unflagging competitive advantage. He has advised on more mergers and acquisitions worldwide than any other major bank while gaining a larger market share than before in 2021, according to data from the Refintiv league table. Goldman ranks second in fees after JPMorgan in general investment banking.

However, not everyone liked Solomon’s style. Some people complain internally about a more centralized decision-making process, which they believe is bureaucratic and runs counter to the free-running culture that has marked years of partnership.

“Because they want to become a Fortune 500 company, there are too many managers,” said one senior Goldman banker, who recently left the company.

Solomon recently moved the executive team offices from the 41st floor of its New York headquarters to the 12th floor overlooking the lobby where employees gather and drink coffee © Nina Westervelt / Bloomberg

Solomon argues that the bank has become more entrepreneurial and innovative.

“What we have done is try to streamline our processes because it actually gives us a greater ability to decide decisively where to invest,” he said.

In guiding Goldman through the Covid-19 pandemic, Solomon also faced the question of when to bring 43,000 of the bank’s employees back to office. In June, Goldman became the first major bank to order employees to return to offices in parts of the United States.

Some rival banks that have taken a more relaxed approach are trying to use this advantage in Wall Street’s fierce war for talent.

Solomon believes the bank has generally “done a good job” in managing the return to the office.

“I’m sure you could find people who were complaining,” Well, they did it and said it, “said Solomon. “But look where we are, you know, we have 50 to 60 percent of our people throughout the United States. We have a larger share of an office in a place like London. “

Now, after three years as chief executive officer, Solomon has signaled that he is not interested in becoming one of the “eternal CEOs” who dominate the boards of some banks. For example, most recently Jamie Dimon, a longtime CEO of JPMorgan He said he planned to stay in the bank “until my death”.

“I certainly cannot say that I will be at Goldman Sachs until the day I die because I hope to live to a ripe old age,” said Solomon. “But right now, I’m taking it one year at a time.”

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