Blankfein Sees Goldman ROE Boost Without Wholesale Change
Goldman Sachs Group Inc. (GS), the U.S. bank most reliant on trading, won’t make any “wholesale strategic change” to help improve returns, Chief Executive Officer Lloyd C. Blankfein said.
“While we have generated good relative returns in the last five years, they are hardly aspirational,” Blankfein, 59, said today at an investor conference in New York. “We are committed to improving them regardless of the challenges presented in the current environment.”
Goldman Sachs has earned a return on equity of 10 percent so far this year, compared with 11 percent in 2012 and more than 30 percent before the financial crisis. The shares trade at 1.06 times book value, indicating that investors estimate the firm’s cost of equity at around 10 percent, a figure that Blankfein said the company is focused on.
“People throw out that number, 10 percent, I happen to think that’s a pretty high number given that the risk-free rate of return is zero,” Blankfein said at a separate conference in New York today. “But the market seems to have focused on that, so we’ve kind of focused on that number. Not for the long-term, but for this part of the cycle, I think that looks OK.”
Goldman Sachs, which before the financial crisis targeted a long-term ROE of 20 percent, has declined to set a goal since then, saying it wanted to see the effects of new rules. Recent international regulations have required banks to hold more equity capital, pushing down ROE.
Blankfein, speaking at the annual meeting of the Securities Industry and Financial Markets Association in New York, said his firm is focused on earning higher returns when the global economy improves and activity increases. It won’t sacrifice that chance in order to earn 10 percent this year, he said.
“We’re not killing ourselves to get there,” he said. “If we’re so far under it that we put our franchise at risk trying to get there, we don’t want to do that.”
Goldman Sachs, whose shares have gained 93 percent since the end of 2008, reduced risk-weighted assets in its fixed-income trading business by $70 billion in the past five quarters, Blankfein said. It also sold stakes in two insurance companies and Chinese lender Industrial & Commercial Bank of China Ltd. to free up capital and boost returns.
Blankfein said the firm would increase ROE -- a measure of how well a company uses reinvested earnings to generate additional profit -- by making “incremental improvements” in revenue, expenses and capital management. He said the current environment offered a “third-quartile opportunity set.”
“We may look back and say this is the golden age, but I’ve been doing this for over 30 years and it doesn’t feel like the golden age,” he said. “It doesn’t feel like the top.”
Goldman Sachs is committed to all of its fixed-income units as well as its activities in the Investing & Lending segment, even as those businesses encounter regulatory change, Blankfein said. The New York-based firm may benefit from some rivals’ decisions to exit or de-emphasize fixed-income, he said.
“Difficult operating environments might lead management teams to overreact,” he said. “However, when you have a strong franchise and a track record of superior returns, overreacting may be the most dangerous thing that you can do.”
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