Goldman Sachs must be thinking wistfully about what might have been. On Wednesday, the US investment bank reported weak second-quarter earnings. Downtrodden investment banking fees accompanied one-time losses in commercial real estate. Scant M&A produced an annualised return on equity of 4 per cent. Dreams of consumer banking riches have been dashed amid a near full-scale abandonment of that pricey effort.
Adding insult to injury, the likes of JPMorgan, Well Fargo, Citigroup and Bank of America are exploiting an almost perfect environment of high interest rates and low delinquencies. Their lending businesses generated $63bn of net interest income in the second quarter. JPMorgan delivered a 38 per cent return on equity in its consumer banking segment.
By contrast, Goldman has faced great internal and external criticism for diving into dull Main Street businesses. It may be the victim of bad luck, poor execution and hubris. But the calculation to diversify its operations remains understandable even now.
Maligned for years in the lengthy era of low interest rates and low growth that followed the financial crisis, big banks were fortified by their brands and massive retail footprints amid regional banking distress.
Among Goldman demerits in the quarter was a $700mn pre-tax impairment from the $2bn acquisition of fintech lender GreenSky. Billions of dollars of investments to build a lending business from scratch became intolerable for Goldman shareholders.
Critics must decide whether they prefer Goldman to be simply a highly volatile, if highly profitable, institutional securities and private capital investing outfit. Those shareholders value Goldman shares at 1.1 times its book value while JP Morgan’s trade at 1.6 times.
As markets stabilise and recover, deal fees and investment profits will rise once again. Excluding one-time costs, Goldman’s ROE in the quarter remained nearly 10 per cent. At some point, leadership will have to decide if the bank makes another big strategic bet. The problem with the last one was execution, not concept.