Investment banking and trading powerhouse Goldman Sachs Group Inc. (GS) has had rough sailing over the past 52 weeks, with its stock down by 31%, compared to a 20% drop for the KBW Bank Stock Index. Long regarded as among the premier franchises on Wall Street, Goldman has been beset by a host of problems, ranging from scandals to growth issues.

Bargain hunters may be enticed to jump in, based on expectations that Goldman will overcome its short and medium term challenges, regaining its premier status in the long run. However, skeptics abound. Respected bank stock analyst Dick Bove told CNBC, “I don’t want to touch Goldman Sachs.”

5 Challenges Facing Goldman:

  • Steadying the ship amid scandals and underperformance
  • Dealing with scandals, which may produce massive fines and penalties
  • Investigations into misconduct may drag on
  • Improving weak business units
  • Making new management team, growth initiatives, and cost controls work

Sources: CNBC, Barron’s, Fortune

Significance for Investors

Steadying the ship: David Solomon, age 57, has been CEO since Oct. 1, 2018, and also chairman since Jan. 1, 2019, succeeding Lloyd Blankfein in both roles. He joined the firm as a partner in 1999, was co-head of investment banking from 2006 to 2016, then president and chief operating officer (COO), per Goldman. Solomon has a difficult task ahead of him, including restoring confidence in the firm amid scandals and underperformance. The confidence-building exercise will involve clients, employees and investors alike.

Scandals: The government of Malaysia has asked Goldman for $7.5 billion in reparations as the result of alleged misconduct in its dealings with state-run investment fund 1MDB, CNBC reports. The 1MDB fund has been accused of corruption and money laundering, and Goldman denies any wrongdoing.

However, bank analyst Dick Bove believes that “their compliance operations internally seem to have broken down,” and cites this as a major reason why he would avoid Goldman’s stock. Michael Carrier, an analyst with Bank of America Merrill Lynch, estimates that Goldman may incur a penalty of up to $2 billion as a result of the 1MDB affair, which would equal roughly one quarter’s worth of earnings, per Barron’s.

Investigations: Bove expects that the Malaysia affair is bound to put Goldman under the microscope of U.S. securities and banking regulators for two or three years, with virtually every aspect of the firm under investigation. Bove thinks that the process may cost Goldman tens of millions of dollars, and perhaps hundreds of millions.

Noting that Goldman "could face fines, penalties and other sanctions," Michael Carrier also stated that investigations could drag on for some time. Moreover, he does not believe that the stock can start recovering until there is more clarity about the potential impacts. On the other hand, he believes that "the stock has more than discounted the outcome" that he projects, specifically a penalty of up to $2 billion.

Improving performance: Goldman's securities trading division has shrunk from delivering more than half the firm's revenue in 2012 to just over one third in 2017, per another CNBC report, which indicates that a turnaround in trading should be a top priority for David Solomon. Earlier in 2018, he indicated that the firm is investing in upgrading its trading technology.

Growth initiatives: Goldman has a plan to increase annual revenue by $5 billion by 2020, partly through new business initiatives, CNBC notes. For example, the firm has entered the market for online consumer banking with its online Marcus accounts, on which it recently boosted interest rates, per a third CNBC report.

"We have the ambition to build a large, differentiated, highly profitable digital consumer finance platform," Solomon said in May 2018, as quoted by CNBC. It is possible that Goldman may look to expand its footprint in consumer financial services by offering insurance, mortgages, auto loans, and wealth management services, CNBC also observes.

Actually, Goldman does offer wealth management services, but only to ultra-wealthy clients with $10 million or more to invest, per SmartAsset. With only 700 financial advisors and $184 billion in assets under management, Goldman has significant growth potential if they decide to lower their account minimums. For example, Morgan Stanley (MS), which has account minimums ranging from $100,000 to $250,000, has 15,712 financial advisors and $2.4 trillion in assets under management, per the same source.

Looking Ahead

Analyst Michael Carrier of BofAML thinks that Goldman has good long term prospects based on his assessment of their new management team, growth initiatives, and cost control efforts. Indeed, despite recent troubles, Goldman remains one of the most storied names in financial services, which should aid its expansion efforts.

If the firm can put the Malaysian scandal behind it, with minimal financial and reputational damage, while also delivering on its growth and diversification initiatives, the stock may be a buy. However, efforts to diversify its business model by expanding into more mass-market banking and financial services will run into established rivals.