Despite Recent Struggles, Goldman Sachs’ Core Business Is Crushing It

The Wall Street giant Goldman Sachs (GS -3.09%) has been in the news a lot lately, and not in the most flattering light.

Toward the end of last year, Goldman announced a major strategic pivot away from its consumer banking business, which it has spent the last six years building out. However, after reporting roughly $3 billion of losses between 2020 and 2022 in this unit of the business, it looks like Goldman is throwing in the towel on it.

Goldman’s CEO David Solomon has taken a lot of flack because the consumer bank was supposed to lead to a higher valuation for the company. But despite troubles on this front, the big reason that Goldman Sachs has the reputation it has is because of its investment banking and sales and trading businesses, which have been absolutely crushing it. Let’s take a look.

A leading franchise gets stronger

The majority of Goldman Sachs’ revenue every year comes from its global banking and markets division. Investment banking includes revenues made from mergers and acquisitions (M&A) advisory, equity underwriting, and fixed-income underwriting. This division also includes revenues from the trading of equities and fixed-income, currency, and commodities (FICC) products. 

Person smiling at desk.

Image source: Getty Images.

Goldman is at the top or holds the second position in nearly all of these businesses. It’s been No. 1 in M&A advisory for 20 straight years. In 2022, it ranked No. 2 in equity underwriting for events such as initial public offerings. It also ranked No. 1 and No. 2 in equity and FICC capital markets, respectively, in 2022 as well.

And the franchise has only gotten better since Goldman’s last investor day in 2020. While total wallet share, or the amount of fees available in each business, has risen in recent years, Goldman has done an excellent job of grabbing more wallet share. Total revenue wallet share since 2020 increased by 3.7%, and every 1% of wallet share represents an additional $500 million of revenue for Goldman.

Furthermore, Goldman Sachs increased its investment banking client base from 9,000 in 2020 to more than 12,000 clients at the end of 2022. In FICC and equities capital markets, Goldman is a top three service provider to 77 of the top 100 alternative asset managers, which is up from 51 in 2019.

The financial returns in the global banking and markets unit have been excellent as well. Roughly 65% of Goldman’s total capital was allocated to the division in 2022 and Goldman generated $32 billion of revenue, a pre-tax profit of $14 billion, and a return on equity of 16.4%.

Goldman Sachs is becoming a more cohesive unit

A big part of Solomon’s vision since becoming CEO has been getting different business lines to better work together and refer business to one another when it makes sense. The goal is to serve Goldman’s clients more holistically and drive more revenue from already strong client relationships. This internal client services approach is called One Goldman Sachs.

The results have been material, with Goldman driving significant wallet share in investment banking and markets. Additionally, 91% of Goldman’s clients do business with three different business units at Goldman. The synergies have also helped Goldman raise $31 billion for Goldman’s alternative asset management business.

Dan Dees, the co-head of Goldman’s global banking and markets business, also discussed how combining the investment bank with the markets franchise and coordinating coverage allowed Goldman to identify new ways for clients to access capital.

“By solving this problem, we created wallet. We didn’t take wallet share from another bank, we created wallet,” said Dees. “We now have a $300 million plus fund finance business where before there was 0. This is one example [of] how going forward this better coordination is going to allow us to better service the client set.”

The stock has performed very well

Goldman continues to take a lot of flack for missteps in its consumer business and justifiably so because the bank definitely made mistakes. Investors have been laser-focused on the consumer business because management had promised that it would lead to a rerating of Goldman’s valuation.

While that didn’t happen, Goldman has exceeded its return targets since its investor day in 2020. Since the very beginning of 2020, Goldman’s stock is up more than 50%, which is widely outperforming the broader market. This is all because of the strong performance in Goldman’s core investment banking and sales and trading businesses.