One Goldman under a groove:
When David Solomon took over as CEO of Goldman Sachs he inherited an extraordinarily powerful franchise. But there was still work to be done and changes that were required. He wanted to move to a model where clients were partners not counterparties. Doing so has moved the bank to the next level. Goldman Sachs is IFR’s Bank of the Year.
Written in Latin above Sir Christopher Wren’s modest tomb in St Paul’s Cathedral in London are the words, "Reader, if you seek his monument, look around you". In a similar vein, if you want to know why Goldman Sachs is IFR’s Bank of the Year for 2021, all you need to do is look around this awards supplement.
The awards book contains articles explaining why Goldman has won IFR awards for M&A Adviser, for Loan House, for Equity House and for Structured Equity House (not to mention the Bank for Financial Institutions and a further helping of regional and deal awards).
A decent haul, to put it mildly, which makes the case for Goldman being the best performing bank in 2021. But the individual award write-ups don’t tell the wider story of how Goldman has been transformed since David Solomon took over from Lloyd Blankfein as CEO on October 1 2018 and chairman a few months later.
And it has been a transformation, even if it is one that built on Goldman’s traditional strengths.
On one hand, Goldman did the things in 2021 it has always been good at – advising on big, complex deals where it excels thanks to its expertise, its network of contacts and the kind of insight that only comes from experience and brains.
To take the most high-profile examples (to stand in for the many other transactions highlighted elsewhere in this awards book): Goldman advised on deals at four of the world's largest companies – General Electric, Toshiba, Johnson & Johnson and Daimler – as each announced arguably the biggest transformations in their long histories. There were other banks involved, of course, but only Goldman was on all four.
So far, so Goldman. But 2021 also showed how Solomon’s Goldman is distinct from what came before. In particular, how his background as a relationship guy has informed his view of how the bank should operate – that it shouldn’t view every interaction as a transaction, but an opportunity to build a relationship.
For Goldman staff, the change was set out in a memo on Solomon's first day as CEO. For outsiders, the key moment was the bank's first ever investor day just over a year later.
Jim Esposito, global co-head of Goldman’s investment banking division (and previously global co-head of markets), said that memo set the tone for what was to follow. “The very first memo that David put out to the firm was around the launch of this One Goldman Sachs initiative,” said Esposito. “David and John [COO John Waldron] in that memo talk about the number one strategic pillar, the foundation of their leadership: client-centricity.
“For those of us watching in the trenches that was an important moment.”
Asked how this manifests itself, Esposito points to changes in how Goldman’s traders operate. “In sales and trading we always had a good business. [But in the past] clients would say ‘we traded with Goldman, because they're smart, they're big, but it wasn't necessarily a deep relationship – it was more transactional’.”
Now, he says, clients see Goldman investing in their mutual relationship and being more long-term oriented.
“Prior to this, the expectation of a Goldman Sachs trader was to make money 10 out of 10 times we do a trade," Esposito said (a strategy that had obvious implications for those on the other side of trades).
"But that's not the way life works. Sometimes you have got to take the rough with the smooth. And when we were trying to make money out of every trade, we started to miss a lot of business, and we became a little less relevant.
“Trying to do almost every trade doesn't mean we're making money on every trade. But the portfolio effect of being back in the flows has been creative and additive to our bottom line.
“And then what you find when you partner with these large clients, they'll start to say: ‘Hey, you did that hard stuff for me. Now I’ve got to do this whole reshuffling of a portfolio over here. I'm going to give you that piece of business’.”
Marc Nachmann, global co-head of markets (and previously co-head of IBD), argues the new client-centric approach was particularly effective in the crisis conditions of the past two years – and a contrast to how Goldman was viewed in the 2008 financial crisis.
“People give you direct feedback. [They say]: ‘Hey, you guys were really helpful over the last two years. You guys provided liquidity when nobody else was there. You guys provided advice. You guys were always there. You were working with us as partners.’ It was a different experience to the last crisis where people had more the mindset that we were too transactional. Too much focused on ourselves.”
But don’t just take Goldman’s word for it. Here’s James Switzer, global head of fixed-income trading at AllianceBernstein. “Goldman’s success [with AB] is down to the pivot they made a few years ago where they stopped thinking of us as a trading counterparty and they started to think of us as a client,” he said. “It became a partnership, where they really tried to understand the challenges we’re facing. That drove our relationship with them to new heights.”
Scott Goodwin, co-founder at Diameter Capital Partners, a New York-based alternative investment manager, has also seen the benefits of the One Goldman Sachs approach. “Goldman does an excellent job interacting with us across global credit markets. They also do a very good job connecting the dots if we have something we need to hedge in commodities or interest rates – it’s a cohesive place where different groups are incentivised to work together to serve our needs,” he said.
Not just trading
The change in approach to clients is most obvious in the trading arena. But Solomon himself points out that he means it to apply across all the bank’s relationships.
“One of the things I really believed when I was coming into the role was that if you really take care of your clients, you earn their trust over a long period of time, you do what's right, good things will happen,” he said.
“And I think there's no question that when you look at our market share, and our wallet share, over the course of the last three and a half years, we've made real progress.”
Observers might quite reasonably wonder how playing nice with clients can be considered anything but common sense. But doing so wasn’t necessarily usual in banking in general, and at Goldman in particular.
One reason for that is that banking had developed for years in silos where everyone was worried about their own products, their own units, their own P&Ls and even their own clients – without thinking of the wider institution. Goldman, Solomon acknowledges, was no exception. And it was this that the “One Goldman Sachs” model was designed to address.
“We developed this concept of One Goldman Sachs to ensure that the client experience in dealing with Goldman Sachs is extraordinary and uniquely tailored to every client. And I think one of the reasons we've had the market share gains that we've had, and we made the progress we did, and the relative outperformance that we had in 2021, is because of this client-centricity and the way we've managed as a leadership team to really amplify it throughout the organisation.”
The other cultural change central to the Solomon-era Goldman is a greater focus on transparency and openness. It is a personal priority for Solomon and a major transformation for a bank that stayed as a private partnership longer than any of its rivals.
“Goldman's been on an interesting journey. For 130 years it was a private partnership – with a capital P for private,” he said.
But that attitude was no longer fit for purpose, not just after the bank went public in 1999 but in particular after the 2008 crisis. Becoming more open was necessary to bring investors, clients and employees along for the ride.
“Under my leadership of the firm – and this management team’s leadership of the firm – we feel very strongly that if you want investors to come along and join you on a journey to strengthen the firm and drive higher returns, you have to give them a roadmap. You have to give them things to which they can hold us accountable.
“And I think it's helped us. And by the way, it doesn't just help us on the outside with investors; it also helps us on the inside with getting the organisation to pull in one direction.”
The public demonstration of this new attitude came at that investor day on January 29 2020. In an unprecedented show of openness, the 14 sessions – mainly presentations to analysts from Solomon and his lieutenants – were broadcast on Goldman’s website and on YouTube.
It was the first time that Goldman had ever done such an event and saw Solomon making a very public declaration about the new direction – one that he could be judged against.
Watching the various presentations now, it is striking how well the bank has executed on those commitments, whether that’s in the areas in which IFR traditionally focuses (investment banking and trading) or the bank’s other activities such as transaction banking (where it sees huge growth opportunities), the consumer and wealth segment (including the retail offering, Marcus, and the bank’s high-net-worth franchise) and the alternatives platform (essentially private and growth equity investments and merchant banking).
There isn’t room here to go through all of those areas, but one Solomon-led initiative is very much worthy of mention: the cross-markets group. This saw the bank make a concerted effort to expand its advisory client footprint beyond its biggest clients. Goldman now covers some 12,000 clients, up from around 9,000 at the time of the investor day. And it has certainly paid off across the bank, nowhere more obviously than M&A where Goldman’s deal count in 2021 jumped nearly 50% relative to 2020, while the M&A deal count across the industry was up some 30%.
What about the numbers?
All of this touch-feely stuff about One Goldman Sachs and client-centricity is all very well but the important thing is how it plays out in the numbers. And here it is possible to take a view just of the past year, or to look past the pandemic-affected period to use the last “normal” year as the base.
Whichever way you do it, the results are undeniably impressive.
Net earnings hit a record US$21.6bn in 2021, more than double the US$9.5bn made in 2020 and the US$8.5bn in 2019, while revenues hit an all-time high of US$59.3bn, up 33% from US$44.6bn in 2020 and a 62% jump from US$36.5bn in 2019, as the bank had its best ever performance in many areas, including M&A advisory, debt underwriting and equity underwriting.
The leap in profits lifted Goldman’s return on tangible equity to 24.3% for 2021, double the 11.8% it achieved in 2020 and 10.6% for 2019 (and not far off double the apparently stretching target announced at the 2020 investor day). That put most rivals in the shade. It eclipsed JP Morgan, which usually leads the pack for returns and had ROTE of 23% for 2021, and bettered the 19.8% at Morgan Stanley.
Goldman’s investment banking division had record revenues of US$14.9bn in 2021, up 58% from 2020 and almost double the US$7.6bn the division pulled in two years ago. That put it ahead of JP Morgan and Morgan Stanley to top the pile for advisory and underwriting.
That lead is even more impressive when measured relative to the number of staff at each institution. Goldman had 43,900 employees at the end of 2021, so on average each produced US$1.35m in revenues. Although comparisons are not always like-for-like, Morgan Stanley’s 74,800 staff and the 67,500 people in JP Morgan’s corporate and investment bank produced nearer US$800,000 per person.
All of Goldman’s areas were on fire, with advisory revenues soaring 84% from 2020 to US$5.7bn, ECM revenue up 47% to US$5bn and DCM revenue swelling 31% to US$3.5bn.
Goldman ranked first for global M&A and ECM fees in 2021, with 10.2% and 9.3% of the fee wallet, respectively, according to Refinitiv data. It ranked fourth for DCM with 4.1% of the wallet, behind market leader JP Morgan’s 6.5% share.
Goldman’s trading also fared well and hit its highest level for 12 years. Global markets revenues of US$22.1bn were up 4% from the strong performance seen in 2020 and 49% above the US$14.8bn in 2019. Equities trading had its second best year ever with revenue up 20% from 2020, which offset a dip in fixed-income, currency and commodities, where revenue was down 9% from a year earlier – although FICC financing had a record year.
Goldman’s revenues are also growing in other areas, vindicating the broader strategy. Asset management pulled in record revenues of US$14.9bn in 2021, and the consumer and wealth management arm delivered its best ever revenues of US$7.5bn.
That helped the firm’s balance – 25% of revenues in 2021 came from investment banking and 37% came from trading (roughly equally split between FICC and equities), with asset management contributing 25% and consumer and wealth the remaining 13%.
Goldman returned US$7.5bn of capital to shareholders during the year, including US$2.3bn of dividends and US$5.2bn of share buybacks.
Some of this should not be surprising. Goldman has clearly benefitted from an unprecedented boom in the areas where it is strong – helped by pandemic-era tailwinds, its strength in M&A and ECM (both turbo-charged by the sudden surge in SPACs).
But Solomon rejects any suggestion that the bank’s outperformance was because the cards it was dealt in 2021 fell in its favour. And he points, quite reasonably, to the above numbers and to the fact that Goldman’s growth in wallet share has outstripped the competition.
And objective observers agree. “It’s been a perfect storm for Goldman – growing more than twice the pace of the industry,” said Michael Turner, head of competitor analytics at Coalition Greenwich, the market intelligence company. “They’re great at M&A, ECM and equities and those were the three best performing industry products last year. But they have also outperformed elsewhere, especially in macro, prime and commodities.”
Let’s play out with a nice formulation from Wells Fargo’s Mike Mayo, doyenne of bank analysts – and no one’s idea of an investment banking patsy.
Goldman, he says, “has monetised mindshare into market share. They are living up to the premium legacy image from their glory days.”
And that, for all of Solomon’s focus on change, is key. It’s not quite “everything must change so that everything can stay the same” but it’s close. Or as Mayo puts it: “2021 showed that Goldman is still Goldman.”
Additional reporting by Christopher Whittall, Philip Scipio and Steve Slater
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