Why Goldman Sachs Is Getting Out Of ‘Banking’

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

That’s a very big deal.

I mean, think about it.

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 ANZ’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.

The challenges of the 2008 financial crisis and the subsequent new regulatory burdens have dampened banking’s appeal.  The former ‘Masters of the Universe’ are looking decidedly boring these days.

From an investor’s point of view at least.

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 through the economy.

Goldman Sachs desperately wants in on it.

The game of course is fintech.

And it’s where the big money is being made.

And investors can’t get enough of it.

Goldman Sachs knows that if they can get in on it, its value could be set to explode.

So they’re now trying to sell themselves as a fintech company.

But I think they’re 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, The Lending Club [NYSE:LC].

This fintech innovator is valued by investors at 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 re-invest itself as a tech group rather than an investment bank. 

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

For instance, it’s online lending business only represents US$1 billion of a $1 trillion dollar 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.

You see there is real innovation happening.

Massive changes are just around the corner.

But they don’t need a Goldman Sachs or JP Morgan to become a 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 one bitcoin is worth?

No they don’t.

But there’s conceivable reasons why it could be worth $1 million in ten 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 them still sitting in the middle of the transaction taking their clip.

Blockchain and cryptocurrencies remove them from the chain.

Remove the very need for them.

If you’re Goldman, that’s scary.

But just like the famous 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 middle man required.

Its implications are profound.

And they’ll be more 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 rewards over the next decade.

Good Investing,

Ryan Dinse
Editor, Money Morning

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 Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle.

Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.

Ryan's premium publications include:

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