Goldman Sachs Group Inc. (GS), whose stock has gone nowhere over the past two years as the firm has failed to keep pace with a rapidly changing financial industry, is expected to report third-quarter earnings on October 15. Investors will be looking for evidence that Goldman’s new CEO David Solomon, who took over from long-standing chief Lloyd Blankfein last fall, is taking strides to keep the bank moving forward along its “evolutionary path.”
What Goldman Sachs Investors Are Watching For
Making the necessary changes will take time. Investors shouldn’t expect to see a huge rebound in earnings as Goldman increases expenses on new lines of business and financial products. Investors will want to see evidence that the revenue mix is shifting away from the bank’s traditional trading and investment-banking activities and towards more retail-banking and lending activities, and that its revenue streams are becoming more durable.
Analysts’ 3Q Estimates
Wall Street analysts aren’t expecting any fireworks for Goldman’s upcoming third-quarter earnings report. They predict earnings per share (EPS) to fall by 12.1% from the three-month period a year ago, according to Yahoo! Finance. Revenues are expected to grow by just 0.50% from the year-ago period.
However, it wouldn’t be surprising to see the bank beat earnings expectations as it has done in the past four quarters. Earnings came in 18.8% above expectations in the last quarter. They were, however, lower than a year ago with expenses increasing as the bank spent heavily on retail banking and corporate-cash management initiatives. Revenue, which came in at $9.46 billion, also beat expectations, but was also lower than a year ago.
Falling Behind in a Rapidly Changing Industry
The financial industry is in the midst of the “Fourth Industrial Revolution,” according to Odeon Capital analyst Dick Bove, and Goldman Sachs is missing it. Two of Goldman’s core businesses—trading and investment banking—have been hit by digitization, one of the leading reasons the bank’s revenues are much lower than they were ten years ago. The bank has simply “failed to take the necessary steps to evolve with the changes” Bove wrote in early September, per Bloomberg.
Specifically, Bove thinks the bank has missed out on increasing target markets, adding new innovative financial products, being more aggressive in the ETF space, and creating more recurring types of revenue streams from businesses like lending. However, he is confident that Solomon is aware of the challenges that Goldman faces. “I respect CEO David Solomon because he seems to clearly understand the problem that Goldman Sachs is in and he is moving aggressively to fix it,” wrote Bove.
Putting the Bank on an Evolutionary Path
In his opening statement during Goldman’s first quarter, Solomon indicated that the bank was “on an evolutionary path.” He noted how the bank was focused on new opportunities and diversifying its business mix. Some of the new initiatives have been the introduction of an online service offering personal loans and savings accounts with interest rates well above traditional brick-and-mortar competitors, and a recent partnership with Apple Inc. (AAPL) to help the technology giant launch its new credit card.
As part of the changes being made, Goldman has been reducing the number of people in the company in top positions. As many as a dozen partners are currently in talks to leave the bank by the end of the year, which would bring the total number of departing partners in 2019 to about 15%. While that exodus is a sign of the challenges facing the bank, it’s also a sign that Solomon is serious about turning things around.
Still, all these changes will take time before their positive impact on earnings and revenue start to show. Solomon emphasized this fact in Goldman’s first-quarter earnings call, saying, “We’re looking to build value over the next three to five years, not over the next couple quarters.”