Goldman’s price-to-book ratio -- a closely followed metric that shows how investors value a firm’s assets – is below where it was when Solomon took over the top spot almost four years ago, despite a strategy refresh. The stock has trailed arch rival Morgan Stanley after the firm made key acquisitions of E*Trade and Eaton Vance.
Goldman’s leadership has concluded that the market is keen on hearing about a more diversified business.
While the management team is excited about plans to grow the consumer unit, it doesn’t resonate with investors, according to UBS Group AG analyst Brennan Hawken.
“I’ve seen discussions where investors have expressed their distaste and frustration about the level of attention paid to the consumer business,” he said. “They don’t see that as a value-enhancing proposition.”
The path to higher multiples for Goldman’s stock still relies on building a diversified business with a strong consumer franchise, according to Devin Ryan, an analyst at Citizens Financial Group Inc. But that also means paying heed to expense drain.
“They do need to turn the corner in consumer, and need to inflect toward meaningful profitability,” Ryan said. “Now is a good time for the debate, for everyone to look at all the businesses and the path to profitability.”
Patrick Cantlay
The consumer business has moved beyond just the loans, deposits and the Apple credit card offering it had when Goldman held its Investor Day in 2020.
The firm expanded its credit-card partnerships by adding the General Motors Co. branded cards. The bigger play it made was the purchase of the buy now, pay later provider GreenSky, the biggest acquisition the firm has made under Solomon. Loan originations that would amount to a few billion dollars would force the bank to take some loss provisions upfront based on the lifetime default expectations on the borrowings.
But since Goldman’s September purchase of the specialty lender, the market for its competitors and comparable companies has tanked.
For Goldman, it is critical these offerings start throwing off consistent earnings -- enough to convince investors it has a strong venture that can offset vagaries in its core trading and banking operations.
A pandemic boom for Wall Street helped provide the Main Street unit a longer runway to grow. But as Goldman’s overall business comes off a high, the division’s losses could complicate other decisions, especially how to compensate its Wall Street rainmakers.
“Compensation can only go down so much and it would be a problem especially if some of these other businesses are still in the loss-making stage,” UBS’s Hawken said. “That could be a strategic misstep that could damage the core business.”
This article was provided by Bloomberg News.