LONDON, Sept 12 (IFR) - Goldman Sachs expects to increase annual revenues by at least US$5bn by filling client gaps in its troubled fixed income business, ramping up its new consumer bank and several other measures, the Wall Street bank said in a rare look “under the hood”.
The revenue growth should be achieved within three years and increase pre-tax earnings by US$2.5bn and improve return on equity by about 150bp, Harvey Schwartz, president and co-chief operating officer, said on Tuesday.
“We have a series of growth initiatives that are designed to drive US$5bn of incremental annual revenues,” Schwartz told investors at the Barclays financial conference in New York.
“To be clear, the initiatives we’re outlining today, they aren’t hypothetical. They are already underway. We estimate the full impact will be realised in three years,” he said.
Schwartz said US$1bn of the revenues will come from its fixed income, currencies and commodities business (FICC); US$2bn will come from lending and financing; US$500m will come from investment banking; US$1bn is from investment management; and US$500m will come from equities.
He said the estimates are based on no improvement to the current difficult trading and economic environment.
FICC is attracting the most attention at Goldman, after a slump in its revenues this year left it underperforming rivals.
Schwartz said the market environment so far in the third quarter has “felt a lot like the first and second quarters”, with low volatility but active financing markets and good M&A activity. He said most of the bank’s businesses were performing well, but FICC still faced headwinds.
“For FICC, it’s a pretty challenging environment for us,” he said.
But he said the business is a big part of its future growth plans. “We are not satisfied with our recent performance in FICC; we’re intensely focused on it, we know you are as well.”
Goldman’s FICC revenues this year have tumbled 21% from the first half of 2016, far worse than a 3% rise across the top 12 banks, according to IFR estimates.
Analysts have blamed Goldman’s poor showing on problems in its commodities business and because its clients include more hedge funds and asset managers, who have pulled back from the market, rather than corporate clients, who have traded more actively.
“Given our client mix and lower activity levels, our opportunity set has been more challenged during the first half of the year,” Schwartz acknowledged.
He said growing FICC business with banks, asset managers and insurance companies offered a US$600m revenue opportunity. The bank also intends to strengthen its focus on corporate clients and increase its financing, to take expected FICC revenue growth to US$1bn or more.
“Importantly, we believe this is attainable even if the market remains challenged, like it is today. If we see modest or perhaps more significant improvement in the operating environment, we expect FICC to deliver significantly more upside,” he said.
Elsewhere, Schwartz said its lending initiatives should provide US$2bn or more of extra revenues. Marcus, its online consumer bank that was launched in the US late last year, and other deposit platforms should deliver US$1bn of that. Schwartz said another US$500m should come from lending and financing to areas, including the middle market and structured credit, and another US$500m should come from increasing lending in private wealth management.
And Schwartz reckons Goldman can increase investment banking division revenues by US$500m by deepening its relationship with clients where it has less share of their wallet.
It is rare for Goldman to provide trading updates or financial details on its plans, which Schwartz acknowledged.
He said the revenue opportunity he outlined was not intended to be a target, but to provide guidance on initiatives.
“These are things to give you a sense of what’s happening under the hood of Goldman Sachs, how we think about the business,” he said.
“We have a long-term plan. We’re in execution mode. And we know that by effectively delivering on these opportunities, we will create greater value for our clients and, by extension, our shareholders.” (Reporting by Steve Slater)