|11 November, 2019

Goldman Sachs demonstrates tyranny of targets

The $79bln Wall Street firm said two years ago that it hoped to fatten its top line

The Goldman Sachs company logo is seen in the company's space on the floor of the New York Stock Exchange, (NYSE) in New York, U.S., April 17, 2018.

The Goldman Sachs company logo is seen in the company's space on the floor of the New York Stock Exchange, (NYSE) in New York, U.S., April 17, 2018.

REUTERS/Brendan McDermid

NEW YORK - A target is meant to show what a company wants to achieve, while strategy is how it’s going to get there. Sometimes the two get mixed up. Goldman Sachs’ plan to get $5 billion of extra revenue, a goal that’s receding into the mist as its first-ever investor day in January approaches, is one such case.

The $79 billion Wall Street firm said two years ago that it hoped to fatten its top line from fixed-income trading, lending, smarter deployment of its investment bankers, and so on. A year later, with David Solomon installed as chief executive, Goldman said it was half way towards the $5 billion number. Since then, radio silence. The bank may unveil new targets early next year, Reuters reported on Monday.

The revenue target is too slippery to be of much use anyway. Goldman depends partly on volatile markets – for example, its quarterly income from fixed-income trading over the past five years has been as low as $822 million and as high as $3.1 billion. Investors already see overall revenue targets as a moveable feast. A year ago, analysts expected Goldman’s 2020 top line to hit $39 billion, according to Refinitiv data, $7 billion more than in 2017. Now the forecast number for next year is closer to $36 billion.

Goldman’s crosstown rival Citigroup has repeatedly missed its own targets. But at least they are easily measurable and relevant to investors, such as the share of revenue eaten up by costs, and the return the bank delivers on its equity. CEO Mike Corbat is currently chasing a 53% efficiency ratio for 2020, but analysts expect the actual number to fall short at around 56%, according to Refinitiv data.

There’s no joy in missing targets, especially for a still-new boss with something to prove. But Solomon’s investors deserve metrics against which to measure him, such as return on equity, or a target for getting volatile trading revenue down from 40% of the firm’s total last quarter, twice the ratio at Citi, JPMorgan and Bank of America.

More revenue in other businesses might be one way to get there, but it’s not in itself a particularly useful or measurable goal. If a company is going to subject itself to the tyranny of targets, they might as well be useful to investors.

CONTEXT NEWS

- Goldman Sachs may move away from a goal of creating $5 billion in fresh revenue by 2020 when it holds its investor day in January, Reuters reported on Nov. 11 citing sources familiar with the matter.

- The Wall Street firm could unveil new targets including a broad efficiency ratio, a measure that shows how costs compare to revenue, and other profitability indicators.

- The $5 billion growth plan was first outlined in September 2017 at a financial conference in New York. Roughly a year later, the company said it was half way towards that number.

- Goldman has scheduled its first-ever investor day for Jan. 29, and said that Chief Executive David Solomon would outline the firm’s strategic priorities. Solomon took over in October 2018.

(Editing by Richard Beales and Leigh Anderson)

© Reuters News 2019

More From Equities