Goldman Sachs Group chairman and CEO Lloyd Blankfein.Bryan Bedder/Getty Images for The New York TimesGoldman Sachs has a plan.
The US investment bank, which has been under pressure over its misfiring bond trading business, on Tuesday set out a strategy to generate an additional $1 billion plus in fixed income, currencies and commodities revenues.
The plan, presented by Harvey Schwartz, president and co-chief operating officer, at the Barclays Financial Services Conference, identified a further $4 billion in revenue opportunities in other business areas across the group. But it was the fixed income, currencies and commodities business that dominated, taking up nine of the 24 pages.
"An important component of our future growth plan is our fixed income, currencies and commodities franchise," he said. "We are not satisfied with our recent performance in FICC. We are intensely focused on it. We know you are, as well."
Here's what you need to know about Goldman Sachs' strategy to get the FICC business firing:
It's not so bad.
Goldman Sachs' leadership has faced numerous questions about the loss of market share in fixed income, currencies and commodities in recent years. In addressing those questions, they've often sought to stress the need for perspective: Goldman Sachs' market share in 2009 was probably unsustainable, and the bank's current market share of around 10% is still higher than it was in 2005.
Schwartz said:
"Since 2009, we’ve seen a pretty steady decline in the industry wallet. We certainly weren’t immune to that. In the last 12 months, industry wallet was roughly half of the peak. It’s fell to $66 billion. Our share roughly 10% understandably below the 2009 peak, but nevertheless above our 2005 share."
Goldman Sachs has already made deep cuts to the FICC business.
Schwartz put some details on the scale of the reshaping of the FICC business, with headcount down 30% in micro (think credit-related products), and 15% in macro (rates, currencies). In other words, the FICC business has hardly stood still.
Now, it's focused on opportunities.
Goldman Sachs' market making revenues are comparable with those of universal banks, according to the presentation, with Goldman posting $6.7 billion in revenues, versus $7.7 billion at universal banks. Where it loses out is in financing opportunities. That stands to reason, given universal banks have huge balance sheets, but Goldman spies an opportunity.
"With greater focus on liquidity provision, and less reliance on lending income, our addressable market in FICC is fundamentally different than many of our peers," Schwartz said.
Goldman Sachs has suffered as hedge funds have suffered.
Schwartz provided some rarely seen detail on sales performance by client type. Sales credits are down heavily for hedge funds. Given hedge funds make up almost a quarter of Goldman Sachs' sales credits, that's a problem for the bank.
"We’ve dedicated significant resources to providing greater value to our asset manager and corporate clients. We believe this is reflected in the growth – in those segments since 2012," Schwartz said. "But across every segment, there is always more work to do."
Now, it wants to go after different clients.
On another slide, Schwartz provided detail on where Goldman Sachs ranks with certain clients. For example, it ranks as a top three provider with 170 hedge funds, which represents more than half of the hedge funds Goldman does business with. In contrast, it's a top three provider to 90 asset management clients, equivalent to just 30% of the asset managers it does business with. There's a similar ratio for banks too. Closing that gap and upping the level of penetration with banks and asset managers is a $600 million opportunity, according to Schwartz.
"Bottom-line, we are not satisfied that there are roughly 600 clients where we don’t rank top three," Schwartz said. "Not only unacceptable. It’s also a great opportunity to provide incremental value to clients."
And do more business with corporates.
A recurring talking point in discussions around Goldman Sachs' FICC position is its position (or lack thereof) with corporates. While universal banks can count on recurring revenue from multinational corporate accounts, Goldman Sachs has been more heavily exposed to the fortunes of hedge funds. Schwartz said Goldman Sachs is hoping to grow the corporate franchise with FICC, which currently makes up 16% of the business, and boost revenues by $250 million.
"We have the leading investment banking franchise," Schwartz said. "We also have a significant global financing franchise. However, our corporate client base is underweighed versus peers and we are committed to expanding it."
The bank is also focused on that financing opportunity, earmarking an additional $5 billion in balance sheet dedicated to client inventory financing over the next few years. That represents a $100 million revenue opportunity, according to the presentation.
And it's hiring (especially in sales).
Goldman Sachs has made a lot of lateral hires in FICC in 2017, according to the presentation, with a particular focus on sales, and in Europe, the Middle East and Africa.
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