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Goldman Sachs vows to lift returns to catch up with Wall Street rivals

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Via Financial Times

Goldman Sachs has vowed to sharply increase its returns in an effort to catch up with Wall Street rivals that have adapted better to post-crisis shifts in capital markets. 

At its first-ever investor day on Wednesday, the US bank said it was planning to achieve a return on tangible equity — a key metric for investors in financial groups — of more than 14 per cent by 2022.

Shares in Goldman, which have underperformed rivals for much of the past decade, fell 0.4 per cent as investors reacted cautiously to plans from an institution that they have previously criticised for refusing to give financial targets and being too slow to respond to the post-financial crisis landscape.

After years of sub-par returns, Goldman is engaged in a radical overhaul of its operations. It is trying to expand beyond its roots in trading and investment banking into more mundane services such as current accounts, money management and credit cards. Part of this involves targeting smaller customers that in the past it would have ignored.

Chief executive David Solomon told investors that, in the longer term, the bank would “seek to achieve returns in the mid-teens or higher” as these newer businesses, such as transaction banking and consumer banking, “mature” and the bank grows its alternatives investing business and wealth management. 

Most of Goldman’s promised improvement in profitability comes from revenue growth, rather than cutting costs. This prompted scepticism from some analysts, including UBS’s Brennan Hawkens, who told clients that the vow to add revenues from new business lines “carries the greatest risk”.

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The return on tangible equity target, which includes $1.3bn of cost savings during the next three years, would be a significant improvement on the 10.6 per cent return that Goldman made last year and on its average of 9.9 per cent during the past decade. 

The US bank outlined more details as to how these newer businesses will contribute to boosting its performance.

Over the next five years Goldman is targeting $100bn of net inflows to its alternatives investment business while aiming to double consumer banking deposits and add 300,000 individual clients to its wealth management business. In the same timeframe it plans to establish a cash management business with $1bn in revenues and $50bn of deposit balances.

Evercore ISI analyst Glenn Schorr told clients on Wednesday that Goldman’s targets were “good enough if you are patient and have confidence” in the US bank’s ability to execute its plans. 

Goldman’s revised targets put it more in line with those of peers such as JPMorgan, whose big retail bank and cash management division helped it weather a 50 per cent fall in trading revenues in the decade after 2009.

JPMorgan Chase has a medium-term goal of a return on tangible equity of about 17 per cent, while Morgan Stanley’s is set in the 13 to 15 per cent range for this year and next, with 15-17 per cent over the longer term. 

Goldman’s large bond and stock trading business, which was its biggest asset in the pre-crisis years, has been hurt since then by plummeting margins, higher capital charges and fierce competition from hedge funds and other rivals.

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Wednesday’s presentations laid bare the challenging economics of the trading business, which Goldman revealed had a return on equity of just 7 per cent last year. Finance boss Stephen Scherr said the global markets division “will benefit most” from cost cuts and could achieve a return on equity of 10 per cent over the medium term.

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