Why Goldman Sachs Is Getting Out of ‘Banking’

Goldman Sachs Group Inc. [NYSE:GS] doesn’t want to be a bank anymore.

That’s a very big deal.

The company that’s become the very epitome of capitalism doesn’t think there’s enough money in banking anymore!

You only need to look at Australia and New Zealand Banking Group’s [ASX:ANZ] almost $7 billion cash profit today to be confused by this. Banking is probably the most profitable business in the world.

Or at least it has been for the last few decades.

What’s going on here?

Well, one reason is perhaps the post-GFC hangover, in particular the regulatory burdens that befell banks. And now that the party is over, the former ‘Masters of the Universe’ are looking decidedly boring these days.

At least from an investor standpoint.

You see, there’s a new game in town. And valuations in this sector are soaring. They could even get a lot higher as its effects spread throughout the economy.

Goldman Sachs desperately wants in on it.

The game, of course, is fintech, short for financial technology.

Fintech is where the big money is being made.

And investors can’t get enough of it.

Goldman Sachs knows that if it can make waves in this space, its value could explode.

So it’s now trying to sell itself as a fintech company.

But I think it’s fighting a losing battle.

Let me explain why…

Goldman Sachs wants this valuation trick

Goldman Sachs is currently trading at a price-to-book valuation of 1.1-times.

In other words, its shares are worth 10% more than the value of its net assets.

That’s actually pretty good compared to most other banks.

But compare that with the market’s view of peer-to-peer lender LendingClub Corp [NYSE:LC].

This fintech innovator is valued by investors at a price-to-book value of 2.6-times.

And that’s despite an 80% share price fall over the last two years.

It’s no wonder that Goldman Sachs is trying to reinvent itself as a tech group rather than an investment bank. 

Goldman Sachs CEO Lloyd Blankfein has been selling the idea for a few years now. He describes Goldman as ‘a technology company with a bank attached.

But the market is not convinced. Not judging by the current valuation metrics, anyway. And, in important ways, Goldman is very much a comparative fintech minnow.

For instance, its online lending business only represents US$1 billion of a $1-trillion balance sheet. And online lending is hardly the cutting edge of finance.

In fact, it’s probably even a little a bit passé these days.

Blankfein’s claims seem more ‘window dressing’ than reality. An act of desperation by a fading star trying to recreate its glory days.

The real fintech jocks — in true Revenge of the Nerds style — are looking down sneering slightly.

There is real innovation happening.

Massive changes are just around the corner.

But they don’t need a Goldman Sachs or JPMorgan jumping on-board to become reality.

Hot money is moving

Investors look to invest money in the hot sectors. Traditional metrics begin to make less sense when you are dealing with growth assets.

Take cryptocurrencies for instance.

Does anyone know what a single bitcoin is worth?

They don’t.

But there are conceivable reasons why it could be worth $1 million in 10 years.

Or zero.

Now, I’m certainly bullish on a bunch of cryptos like bitcoin. But I think the revolution that it has enabled is a lot more certain in a few important ways. And potentially as lucrative for early investors.

Blockchain technology is starting to infiltrate the cosy monopolies of banking and finance. And that’s why Goldman is running scared.

Goldman doesn’t actually want true innovation. It wants the pretence, but with it still sitting in the middle of the transaction taking its clip.

Blockchain and cryptocurrencies remove the likes of Goldman from the chain.

They remove the very need for them.

If you’re Goldman, that’s scary.

But, similarly to how the well-renowned camera company Kodak died in the age of the digital camera, blockchain technology is going to hit the unprepared, the unnecessary and the uninvested just as hard.

There’s a lot to it. More than I will go into here.

But the key is decentralisation. No middlemen required.

Its implications are profound.

And they’ll be a lot widespread than even some in the industry realise. For investors, the opportunities to get in on the stocks that will benefit from the valuation surge is already starting to play out.

Hunt them down now and get set to reap the potential rewards over the next decade.

Good investing,

Ryan Dinse,
For Markets & Money

PS: I’ve just released a report on why the next few weeks could be the start of a crucial point for a certain group of stocks. These stocks have great potential for gains in the blockchain future. You need to know about this. Read more here


Ryan Dinse is an analyst at Markets and Money. He has two decades of experience in financial planning, equity analysis and credit markets. Ryan combines fundamental, technical and economic analysis to identify and invest in good ideas at the appropriate stage of the economic cycle. He has a strong interest in technology, economic history and disruptive business models. His focus at the moment is as lead analyst on two of our most recent and innovative investor services, Crash Market Investor and Sam Volkering’s Secret Crypto Network. He will write about the exciting opportunities for investors to benefit from significant changes in world markets. He is a member of Fintech Australia, a former member of the Digital Currency Council, and is a fully accredited financial adviser.


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