David Solomon says Goldman Sachs’ blockbuster 2021 was no fluke

Goldman Sachs on Thursday upgraded its key profitability targets and set new goals for its asset management, transaction banking and consumer businesses as it laid out its strategy for the next three years.

Wall Street’s premier investment bank is reshaping itself after a turbulent decade during which profit at its core trading businesses was crimped by tougher regulations enacted after the 2007-09 financial crisis.

Chief Executive David Solomon pointed to progress made over the past two years and said the bank would build on that despite headwinds such as inflation and an anticipated slowdown in investment banking and trading activity.

“We believe we have the right plan in place that will enable us to serve clients, drive returns and unlock significant value for our shareholders,” Solomon said in a presentation at the Credit Suisse Financial Services Forum in Florida.

The bank said it expects a 15-17% return on tangible equity (RoTE) over the next three years, up from its previous mid-term guidance of 14%. It expects a return on equity of 14-16%, compared with 13% previously.

That target is behind goals set by Morgan Stanley, which is targeting an RoTE of at least 20% over the longer term, and JPMorgan, which has set a medium-term RoTE goal of 17%.

Despite Goldman’s record profit in 2021, Solomon is still trying to win over some analysts and investors skeptical about whether it can sustain its strong performance when market conditions normalize.

The traditional investment banking and trading businesses benefited from a deal-making boom and rising asset prices when the Federal Reserve pumped trillions of dollars into financial markets.

Solomon acknowledged the market backdrop is changing but said Goldman is nimble enough to adapt.

“It’s good to see that they are admitting that 2021 was a windfall year that is almost impossible to repeat,” said Viola Risk Advisors founder David Hendler. “Steady progress in the newer areas like asset management, consumer and wealth should make their activities more predictable.”

JMP Securities analyst Devin Ryan said Solomon had made a strong case for why his strategy is the right one.

“We are encouraged to see the firm pushing forward on its strategic goals,” he said.

Goldman shares were down 2.4% in afternoon trading, in line with the US banking sector .SPXBK, which was hit by escalating tensions between Russia and Ukraine.

The shares currently trade at 1.3 times the value of Goldman’s assets while rivals Morgan Stanley MS.N and JPMorgan JPM.N trade at close to double book value.

Goldman reiterated its efficiency ratio goal of 60%, which effectively means it is running the business at a 40% operating margin.

The bank also set new deposit and revenue goals for transaction and consumer banking.

It expects transaction banking deposits of more than $100 billion by 2024 compared with $54 billion last year. Transaction banking revenues are expected to rise to $750 million by 2024 from $226 last year, the bank said.

Consumer banking deposits are expected to grow to more than $150 billion by 2024 compared with $110 billion last year. Consumer banking revenues are expected to rise to more than $4 billion by 2024 from $1.5 billion last year.

In asset management, the bank is targeting fees of more than $10 billion by 2024, including more than $2 billion derived from alternative assets such as private equity and real estate.