The coronavirus crisis will force a lot of banks to rethink how they do business, certainly in the short term and likely in the long term, too. Goldman Sachs (NYSE:GS) has already been transitioning from its traditional investment banking roots into other areas, like consumer banking, to help mitigate potential adverse effects when certain segments of its business get hit by a crisis.
Chairman and CEO David Solomon provided some details on Goldman Sachs' efforts in a letter to shareholders in late March. In the letter, Solomon explained that the transition continues. Solomon outlined three strategic goals for the company over the next one to five years, which include plans to strengthen existing businesses while expanding into new markets. Is the bank on the right course? Let's take a look at the goals he set forth.
Goal 1: Growth of existing businesses
Goldman Sachs has four main lines of business with the largest being capital markets, which accounts for about 40% of its revenue. Here, the firm generates revenue from conducting trades for institutional clients. Next is the asset management business, which accounts for 25% of revenue, followed by investment banking, which generates about 21% of revenue. The fourth line of business is consumer and wealth management, which comes with its traditional banking operations with private wealth management. This area represents about 14% of revenue.
The company had slight revenue gains in capital markets, asset management, and consumer and wealth management in 2019. The only segment that lagged was investment banking, where revenue was down 7%. Its most rapid growth came in consumer banking, where revenue grew 41% for the year, thanks to the growth of its online bank, Marcus. Solomon expects continued growth in this business, as well as the private wealth management, which it will expand in the European, Middle Eastern and African region (EMEA) and the Asian Pacific (APAC) region.
In this period of significant regulatory and technological change, Solomon also sees opportunities in capital markets. "We are one of the few scaled firms in both FICC [fixed income clearinghouse corporation] and equities, offering clients differentiated risk intermediation, data analytics, and a rapidly evolving set of technology platforms. Our plan is to drive higher returns by instilling further resource discipline and executing on several client initiatives to grow our franchise."
Investment banking will be challenged, as mergers and acquisitions have slowed to a crawl across the globe due to the coronavirus pandemic. But looking out beyond the short term, Goldman Sachs, which is one of the largest investment banks (along with JPMorgan Chase), is looking to expand to cover more companies in the $500 million-$2 billion value. "This is a segment where, historically speaking, we only cover 44 percent of public companies in the Americas and EMEA -- compared to 95 percent of firms over $10 billion and 80 percent in the $2-10 billion range," Solomon wrote.
Goal 2: Diversification into new areas
The second goal is to diversify into new markets (focusing on areas that are adjacent to current business), meet client needs, and capitalize on the firm's competitive advantages. One of these growth markets is transaction banking. Transaction banking addresses the cash management and payment needs of corporate and institutional customers. "Our transaction banking offering is high-tech, low-touch, and client-focused -- and as a user of transaction banking services ourselves, we believe it is unique and differentiated versus existing offerings in the market," Solomon said. The company plans to roll out various offerings this year and it sees an opportunity to gain $50 billion in deposit balances and $1 billion in net revenue over the next five years. "Even a small share of the massive transaction banking market would be accretive," Solomon said.
Alternative investments are another new growth area. Goldman Sachs is already in this space, with about $320 billion in alternative assets, but Solomon believes it is an area ripe for expansion. In December, Goldman Sachs created an Alternatives Capital Markets and Strategy Group within its asset management business to ramp up this business. With its scale and existing partnerships with asset allocators and institutions, the company sees an opportunity to attract $100 billion in net alternative asset inflows in five years.
Furthermore, the firm's digital banking platform, Marcus, has been a strong grower since it was launched in 2016. Last year, revenue grew 41% to $864 million. By 2025, Solomon is targeting $125 billion in deposit balances and $20 billion in loan and card balances.
Goal 3: Operational efficiency
Finally, Goldman Sachs is looking to streamline operations to achieve greater efficiency and cut costs. It's based on the One Goldman Sachs initiative Solomon launched when he became CEO in October 2018, which centers on simplifying touchpoints for clients by delivering services more holistically to large clients. This has resulted in greater efficiencies, which will lead to a projected $1.3 billion in expense savings in three years.
Reaching these goals is important, especially in the current crisis
These three initiatives take on added relevance in this current environment, where digital and online banking capabilities are more vital than ever and expense reduction is a must. But it's not going to be easy for any bank in this market -- and Goldman Sachs is no exception with the stock price down about 33% year to date.
There are strong headwinds going forward with low interest rates and a likely recession to slow down the asset management and investment banking businesses. Right now, it's not a great time to own bank stocks. But Solomon has the company on the right course, and once there's more certainty on the other side of this crisis, it will make a good long-term play -- so keep an eye on it.