Goldman Sachs Shifts Focus on Durability of Revenue Streams

Goldman Sachs CEO David Solomon is shifting the company's narrative from innovation to consistency. With the most recent earnings report showing $1.9 billion for the final quarter, the Wall Street giant is advocating a different perspective on how its revenue should be viewed. Solomon's approach to encompass a more consistent earnings flow may seem apt, but Goldman is still trailing behind its top competitor, Morgan Stanley, in this regard.

Five years ago, Solomon envisioned a diversified Goldman that serviced not just the wealthy but all tiers of customers. This vision did not go as planned, leading to the consumer bank-related losses totaling $1.7 billion in 2023. To counteract this, Goldman now asserts that a significant portion of its revenue, approximately 43% of $46 billion, can be considered steady.

However, Goldman's standards for what's considered 'durable' revenue, including fees, private banking, and lending to occasionally unreliable hedge funds, are somewhat broad. Despite this, Solomon is confident in stating that this steady revenue stream indicates Goldman's earnings may be less erratic than typically perceived. While acknowledging this newfound stability, such revenue has its lowest cyclical parts still amounting to $14.1 billion over a decade.

Even with a new emphasis on durability, Morgan Stanley casts a longer shadow over Goldman with its approach. Morgan Stanley, which has just transitioned CEOs with Ted Pick replacing James Gorman, has taken a different approach to its financial disclosure. It combines wealth and investment fees, interest income, and an equities financing revenue estimate to show that around 60% of its revenue is durable. Morgan Stanley's higher valuation, at 14 times forward earnings versus Goldman's 11, reflects investor confidence in its robust revenue streams.

Goldman is nevertheless making progress, with its durable revenue growing 8% in the past year from 2022. And while consistent earnings are valuable, Goldman excels during buoyant market conditions. The attempt to serve a broader customer base through its now-defunct retail banking venture, however, also proves that Goldman's strengths lie elsewhere. Being all things to all people is not Goldman's forte, as that endeavor showed.

Context News

On January 16, 2023, Goldman Sachs reported a striking 58% increase in earnings compared to the previous year, reaching $1.9 billion for the quarter. This growth was partly driven by a substantial increase from its asset and wealth management division, alongside a drop in fixed-income trading and dealmaking. Conversely, Morgan Stanley disclosed $1.4 billion in earnings for the same quarter, marking a decline of 35% compared to the previous year. The changes in revenue within Morgan Stanley's major sectors remained relatively consistent, while trading and investment banking saw a slight increase.

Goldman, MorganStanley, Earnings