Goldman Blatantly Targets the Rich – Watch Earnings Soar

By Chris Marasco - July 22, 2012 | Tickers: BAC, C, GS, JPM, NES.DL | 0 Comments

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Goldman Sachs (NYSE: GS) has been hit hard by the turbulent environment as the bank has been blistered by a string of troubles. 

First, the regulatory environment is forcing the bank to take unnecessary steps.  For example, the Fed forced Goldman to establish itself as a bank holding company during the financial collapse, causing Goldman undue regulation and distracting the bank from furthering its core businesses.

Next, the market is hitting Goldman where it hurts – in earnings.  Goldman’s earnings from trading and investment banking have fallen considerably.  Taken from Goldman’s July 17 earnings report:

“Net revenues in Investment Banking were $1.20 billion, 17% lower than the second quarter of 2011 and 4% higher than the first quarter of 2012.”

Shorthand, this reads that M&A advisory, underwriting, and trading took a hit.  Why? 

A lackluster market.

But Goldman is ever so resourceful!  If there is one place where the bank can significantly improve, it is in private banking.

JPMorgan (NYSE: JPM) is often considered the market-leading private bank, boasting an astounding $830 billion under management as of May 2012.  And while JPMorgan has a great brand and a superb product, Goldman hopes to quickly catch up.

Goldman’s Plan

In response to the headwinds of today’s economy, Goldman aims to transform itself into more of a traditional bank.  Not traditional in terms of retail banking, but the firm hopes to originate more loans for its wealthy private clients. 

Currently the bank’s private bank is housed under its Asset Management division.  Now, Goldman reports that it is building an in-house lending department for that group of clients.

As of Q1 2012 Goldman created $12 billion in loans – a fair amount – but far short of the $100 billion that Goldman executives hope to create.

This strategy is not unique to Goldman.  Two years ago, Morgan Stanley (NYSE: MS) pulled the same strategy, adding hundreds of bankers to its unit Morgan Stanley Smith Barney.  While MSSB typically handles clients with fewer assets than Goldman or JPMorgan, Morgan Stanley was early to see how it needed to shift its business model.

I applaud Morgan Stanley’s promptness.  Morgan Stanley already had its advisors in place, preparing for the weak economy to extend throughout 2012.

Competition 

Aside from JPMorgan, Goldman faces competition from Bank of America (NYSE: BAC) and Citigroup (NYSE: C).

Bank of America has a robust private bank, which has only become more prominent after it acquired Merrill Lynch in January of 2009.  While the merging of the two companies did create much controversy – especially with Merrill’s President, CEO, and Wealth Management Head leaving after the acquisition – the deal has greatly boosted Bank of America’s private wealth practice.

With exposure from Merrill Lynch, Bank of America is now well-positioned in the marketplace.  Bank of America added a net positive number of Wealth Advisors for the 12^th consecutive quarter, according to its recent earnings report, and increased assets under management from its Global Wealth and Investment Management division by $21.2 billion to a total of $682.2 billion.

Loans also increased $2.5 billion year-over-year to $105.4 billion.

Citigroup is also a competitor.  Citigroup has a smaller private bank, consisting of $250 billion in assets.  Citigroup also takes clients with less net worth compared to its Wall Street counterparts.

Moving Forward

What should investors expect moving forward?  Simply think it through.

The government wants less risk-taking from Wall Street – this means trading, mortgage backed security action, and credit default swap deals will bring in less income for the bank. 

As a result, banks (Goldman especially) will earn less as its highly-regarded traders make their moves with their hands tied behind their backs.  Likewise, bad economic conditions mean smaller fees from M&A Advisory.  Even worse, increasing regulations – and expect them to come in the credit default market – mean less in market-making earnings.

So where do new fees come from?  Old clients.

Watch for Goldman, as well as other banks, to do a better job “referring” (cross-selling) its services.  This means that Goldman wants to be the one-stop-shop for rich people.

Buying a second (or third, or fourth) home? Goldman can help.  Need to finance a jet (or three)?  Goldman wants to make the loan.  Heck, the company will also do your taxes.  Whatever it takes to reverse its declining revenue.

After all, when Goldman makes a loan to high net worth clients, remember where the collateral for the clients’ assets lies.  It is already safely in Goldman’s possession as assets under management.

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