Goldman's New Obsession: Adding $5 Billion in Revenue

After years of cutting, Goldman Sachs Group Inc. is in growth mode, though big questions remain over the future of its debt-trading arm.

A top Goldman executive on Tuesday detailed $5 billion in additional revenue that Goldman could pull in over the next three years, from increasing its lending footprint to reversing declines in its fixed-income division. The figure represents 17% of its revenue last year and would bring Goldman back to 2006 levels.

Goldman has struggled to replace lost revenue since the financial crisis, relying instead of cost cuts to boost margins. Tuesday's presentation outlined a path to growing the top line, more of which -- as much as half -- could be pretax profits if Goldman can keep expenses down, co-Chief Operating Officer Harvey Schwartz said at an industry conference.

Its efforts "aren't hypothetical; they are already under way," Mr. Schwartz said. He said the firm is "completely obsessed" with improving its returns.

Mr. Schwartz said the $5 billion figure assumes the same middling market conditions of low growth, volatility and interest rates that have persisted for years.

"Our relative performance, in the long run, is totally within our control," Goldman's chief executive, Lloyd Blankfein, said in a voice mail Tuesday to the company's 34,000 employees.

Keefe, Bruyette & Woods Inc. analysts said Tuesday that they remain "somewhat skeptical of [Goldman] management's ability to hit these revenues targets" because they require the firm to stretch beyond traditional strengths, growing businesses like lending and asset-management.

A big question mark looms over fixed-income trading, where revenue fell 21% over the first half of the year. Commodities has been particularly challenged, with less than $100 million of revenue over that period, The Wall Street Journal has reported.

Tough conditions are likely to continue into the third quarter, which Mr. Schwartz said has been "pretty challenging."

Still, Mr. Schwartz said fixed-income revenue could grow by $1 billion by 2020. His presentation included more detail that the firm has given in some other presentations -- a likely acknowledgment that investors haven't been satisfied with previous explanations for the trading slump.

A key priority is doubling down on corporate clients and "real-money" accounts like pension funds and insurers, which tend to keep trading in all kinds of market conditions.

Schwartz said there are 600 institutional clients for whom Goldman isn't a top-three broker, and that closing that gap could bring in $600 million in additional revenue over the next three years. The Journal reported earlier this year that Goldman had been working with an industry consultant to take a deep dive on its market share with different types of clients.

Another effort is to win more business from corporate trading offices, which Mr. Schwartz said could bring in another $250 million. Goldman has shifted some corporate currency and commodities trading efforts into its investment bank, working alongside industry specialists than call on companies.

Goldman also hopes to draw more trading business from mergers, loans and stock sales.

Those types of deals often throw off activity such as hedging a loan denominated in a foreign currency. Today, most of that business goes to big commercial banks such as J.P. Morgan Chase & Co. and Citigroup Inc. that are extending those loans. By adding trading experts alongside investment bankers, Goldman hopes to capture more of it.

That dovetails with another growth priority: growing the firm's lending footprint, which Mr. Schwartz estimates could bring in another $2 billion in revenue.

Goldman plans to commit an additional $28 billion of its own capital toward lending activities by 2020, Mr. Schwartz said. That would represent about 3% of its total balance sheet, but increase its current loan book by about 40%.

Write to Liz Hoffman at liz.hoffman@wsj.com

(END) Dow Jones Newswires

September 12, 2017 10:49 ET (14:49 GMT)