The investment bank Goldman Sachs Group (GS 3.30%) launched a consumer banking division in 2016, which included its digital deposit platform Marcus, several credit card partnerships, and the acquisition of the buy now, pay later company GreenSky.
The goal was to diversify Goldman's earnings stream away from the more volatile investment banking and trading businesses. Steadier earnings were supposed to translate into a higher valuation.
But roughly six years later, Goldman is pivoting away from the consumer business after the unit racked up billions in losses. That means the company will need to pursue a different path to achieve a higher valuation, and that path will most certainly lie in continuing to build out its asset and wealth management (AWM) unit.
The current state of AWM
Goldman is certainly not a new player in AWM and it has $2.5 trillion of assets under management. In 2022, AWM made up about 28% of total revenue at Goldman and about 10% of net earnings.
That's nothing to sniff at, but it pales in comparison to rival Morgan Stanley (MS 1.58%), which has significantly bulked up in wealth and investment management in recent years with blockbuster acquisitions such as E*Trade and Eaton Vance.
Morgan Stanley currently generates more than half its revenue from investment and wealth management, and it plans to ramp up this number. Wall Street loves what Chief Executive Officer James Gorman has done with the business and as such investors have rewarded Morgan Stanley with a premium valuation, no matter which way you slice it.
GS price-to-tangible-book-value data by YCharts.
What Goldman needs to do
Goldman clearly must drive its AWM revenue higher and make it a larger percentage of total revenue. But the bank also needs to change the composition of its AWM revenue.
In 2022, Goldman saw net revenue decline by 39%. Meanwhile, Morgan Stanley grew wealth management year over year in 2022 and saw investment management revenue decline about 13.5% year over year.
A big reason for this is that roughly 13% of Goldman's AWM revenue in 2022 was in equity and debt investments, which can swing wildly as market valuations adjust. These businesses are also much more capital intensive.
Morgan Stanley runs more of an advisor-driven, fee-based wealth business, which is much less capital intensive and allowed the bank's wealth business to generate a 16% return on average common equity (ROCE) in 2022, despite a challenging backdrop. Goldman's AWM business only generated a 3.1% ROCE.
Goldman Sachs does have some good scale within its AWM business, and on the most recent earnings call, CEO David Solomon said "there are significant things that could meaningfully accelerate the platform," when asked about the potential for AWM-related acquisitions. However, Solomon added "that the bar to do those things is extraordinarily high" and that "the prices have been eye-popping."
It's doable
Goldman is coming off a big blunder with its consumer banking efforts, so management is really going to have to prove itself, and this will likely be more of a show-me story. However, unlike Goldman's consumer banking efforts, the bank does already have a large AWM business with some scale and is the fifth-largest asset manager in the world.
If Goldman can replicate the success of Morgan Stanley, then it will most certainly trade at a better valuation. But it's always easier said than done. The key will be increasing AWM revenue as a percentage of total revenue and in a less capital-intensive manner.
