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It is 25 years since Goldman Sachs’ groundbreaking 1999 IPO. Current chief executive David Solomon joined the US bank that year, a fact he was keen to remind analysts of on Monday when discussing its second-quarter results.
Investment banking revenues rallied sharply in the past three months as expected, and so far are up 27 per cent year over year for 2024. But some observers were at least mildly disappointed. Annualised return on equity was just a middling 11 per cent as operating expenses, including pay, remain elevated. In the good old days of 1999 that figure was 31 per cent.
A fundamental difference between then and now is that Goldman is subject to the regulation of the Federal Reserve which has tightened capital requirements post-2008. For Goldman, middle age has come with a humbling of aspirations and capabilities.
In May 1999, Goldman’s first public disclosure after listing showed its total equity capital of just $8bn, against $245bn of assets, an implied leverage ratio of 31. Today it has $119bn of equity capital and a leverage ratio of just 14 times.
Like at the turn of the century, Goldman remains dominant in investment banking and sales and trading, though the latter has been deadened by capital and regulatory constraints. Goldman itself is also now protesting the results of its recent Fed “stress test”, the results of which may require it to retain more capital and thus reduce the opportunity for buybacks and dividends.
Goldman is attempting to position itself as a leader in corporate lending, private assets management and wealth management, the hottest new areas of Wall Street. Its fundraising efforts have been going well and it counts about $3tn of assets under “supervision”. But Solomon admitted that the return on equity of the asset management business was still only 10 per cent, and described Goldman’s overall plight as a “journey” towards the promised returns.
On its first day of trading in May 1999, Goldman shares rocketed from its listing price of $53 to at one point, more than $76, implying a price to book value ratio of approaching 5 times. Today, Goldman trades at just 1.5 times. Given the environment and how financial services has changed, the current valuation is not bad. But the strong sense of nostalgia pervading at Goldman this year suddenly starts to make sense.
sujeet.indap@ft.com
