Goldman Sachs In Transition

About: The Goldman Sachs Group, Inc. (GS)
by: John M. Mason

Goldman Sachs is now following other large banks like Citigroup and Morgan Stanley to transition into an organization more compatible with the current financial environment.

Even during the transition, Goldman Sachs produced an 11.1 percent return on shareholders' equity in the first quarter, providing itself with a firm foundation to carry out its planned changes.

A consumer bank and a credit card initiative with Apple will take time in becoming full contributors to the 'new" bank, but Goldman Sachs certainly has the resources and talent.

The situation at Goldman Sachs Group Inc. (NYSE:GS) was defined fairly well by CEO David Solomon in a statement released Monday morning. He said Goldman Sachs was:

... focused on new opportunities to grow and diversify our business mix and serve a broader range of clients globally. With improving momentum across our businesses, we are confident that Goldman Sachs will generate attractive returns for our shareholders.

It should be noted that Goldman Sachs produced good results for the first quarter, earning an 11.1 percent return on shareholders' equity. This puts it in the elite group of high performing large banks, along with JPMorgan Chase (NYSE:JPM), which earned a 16 percent return on shareholders' equity and Wells Fargo (NYSE:WFC) that posted a 12.7 percent return on shareholders' equity.

Goldman Sachs is going through a transition period.

Coming out of the Great Recession, Goldman was positioned very well relative to the other large financial institutions in the country and moved into the recovery with basically the same business model it used before the downturn. Some of its major competitors, specifically Citigroup (NYSE:C), under the new leadership of Michael Corbin, and Morgan Stanley (NYSE:MS), under the new leadership of James Gorman, moved to make major changes in the business models applied to their institutions.

Goldman Sachs has only begun the move to change its business model and so the specific results can be misleading because they really don’t reflect the changes that have taken place.

I focus on the return on shareholders' equity to reflect on the overall performance of the company as it is going through this transition.

In terms of the “old” Goldman Sachs, trading revenue fell by 18 percent.

This reflects, to me, the “old” company that depended very heavily on the trading division of the firm. This source of income is very volatile and highly dependent upon financial market conditions and not a well developed business model that produces steadier revenue streams that tend to grow over time.

The Wall Street Journal outlines a major effort by Goldman Sachs to move into areas more associated with retail commercial banks. For example:

It is growing a consumer bank, partnering with Apple Inc. [(NASDAQ:AAPL)] on its first credit card, raising new investment funds it can collect fees to manage, and building data services it hopes will lure new types of trading clients.

Another part of this effort also includes cost-cutting:

Lower expenses helped close the gap as the bank’s new chief executive, David Solomon, lives up to his reputation as a cost-cutting operator. Expenses were down 11% from a year ago, led by a 20% cut in pay and lower brokerage and exchange fees, which are usually tied to trading activity.

So Goldman Sachs is attempting to catch up with its competitors in transitioning into new world of commercial banking. It still has a ways to go, according to The WSJ:

Those business, though, ‘haven’t yet hit their stride,’ Chief Financial Officer Stephen Scherr said earlier this year. Meanwhile, they have required more than $1 billion of investment spending, and investors being asked for patience are looking for signs of progress.

But, Goldman Sachs did earn an 11.1 percent return on shareholders' equity.

And, it did continue to buy back its own stock, helping the stock price to rise by 21 percent this year.

It seems as if Goldman Sachs is getting the job done. It seems to be moving on into the future, but such transitions still take time to work out, as we have seen in the cases of Citigroup and Morgan Stanley. Goldman Sachs is certainly an organization to keep your eye on.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.