Goldman Sachs CFO Sees Bank ROEs Beating 12% in Long Term

Goldman Sachs Group Inc. Chief Financial Officer Harvey M. Schwartz said the banking industry’s average return on equity will rise above 12 percent as some firms shrink or exit businesses.

“I think the industry will migrate to higher returns because it will have to,” Schwartz, 48, said today at the Credit Suisse Financial Services Forum in Miami. It might be a “question of excess capacity coming out over a long period of time,” he said.

Goldman Sachs, the fifth-biggest U.S. bank by assets, made a 10.7 percent return on average common shareholders’ equity last year, up from 3.7 percent in 2011. Schwartz, who last month called the 2012 figure “not particularly aspirational,” said today that the New York-based company doesn’t yet have sufficient information to provide investors with a ROE target.

More than half of the audience members at the conference said in a poll that they expected average return on equity for the industry to settle at around 12 percent, according to Howard Chen, a Credit Suisse Group AG analyst at the event. Schwartz, who replaced David A. Viniar, 57, as CFO at the end of January, said he’d be surprised if that consensus view proved accurate over the long run.

More banks will exit capital-intensive businesses like fixed-income trading because they’re under pressure from shareholders to boost returns, Schwartz said.

“If you’re not in a leading position in one of those businesses, it’s difficult to stay committed,” he said. “It’s just a question of who executes better and who gets that share.”

Mortgage Size

In his presentation, Schwartz detailed Goldman Sachs’s decision to stick with its mortgage business even after an initial regulatory proposal in December 2011 threatened to increase the capital requirement by 260 percent. Instead, the firm waited, which he said paid off when regulators released a new set of rules that raised the capital requirement by 170 percent instead.

The decision was driven in part by the importance of the mortgage business, which has been a part of the company for almost 30 years, Schwartz said.

“To scrap that and then potentially have to rebuild it?” Schwartz said. “Mortgages remain a critical asset class for our clients and obviously an important business for the firm.”

The firm has in the past de-emphasized the size and importance of its mortgage-underwriting business, an area that came under legal and regulatory scrutiny after the financial crisis. Viniar said on an Oct. 19, 2010, conference call that mortgages have “always been the smallest” of the firm’s fixed-income, currency, and commodity businesses.

‘Really Tiny’

“We are really tiny in the market,” Viniar told analysts at the time. “We were an underwriter, we did it. We are a player in the market. But we’re just not one of the leading players.”

The unit employed 40 percent fewer employees in 2012 than in 2008 and made 14 percent less revenue and 22 percent less in pretax earnings, according to a slide that accompanied Schwartz’s presentation.

Goldman Sachs rose 1 percent to $153.76 in New York Stock Exchange composite trading at 11:03 a.m., the highest since April 2011, amid optimism that bank profits will rise. The Standard & Poor’s 500 Index climbed 6.4 percent this year through yesterday, and the KBW Bank Index advanced 7.5 percent.

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