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Goldman signals it will stay the course with likely succession plan

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Goldman signals it will stay the course with likely succession plan

A major leadership change may be on the horizon, but Goldman Sachs Group Inc. is showing no sign that it will veer from its current strategic plan.

The company announced March 12 that President and co-COO Harvey Schwartz would retire, effective April 20, leaving David Solomon as the company's lone president and COO. The move essentially puts Solomon in place as the heir apparent to Chairman and CEO Lloyd Blankfein, who The Wall Street Journal reported was planning to step down as early as the end of the year.

Sandler O'Neill & Partners LP analyst Jeffery Harte said he would have been comfortable with either Solomon or Schwartz winning out as the leading successor to Blankfein. One difference between the two is that Solomon, who was previously co-head of the investment banking and global head of the financing group, has had more interaction with clients, Harte pointed out. Schwartz, a former Goldman CFO and global co-head of securities, was more focused on investors and the risk management part of the business.

"Harvey moving on suggests that the board decided it was more comfortable with David Solomon running things," Harte said in an interview.

Harte does not think it would make much of a difference for Goldman's strategic direction if Schwartz, and not Solomon, were Blankfein's successor. "Whether it's Lloyd, Harvey or David as CEO three years out or today, I don't think the overall strategy or how they are doing business changes much," the Sandler analyst said. "I think they are all kind of on board with the way they have been running things."

During a September 2017 investor conference presentation, Schwartz outlined a strategic plan for Goldman to grow revenue by $5 billion in three years. Morningstar analyst Michael Wong doubted that Goldman would deviate from that agenda. The investment bank would send conflicting messages to investors if it released one strategy, changed CEOs and then shifted the strategy again soon thereafter, Wong said.

If someone from a smaller business, such as private wealth management, suddenly became a CEO candidate, that could be a sign that Goldman was mulling a strategy change, according to Wong. Had the company elevated someone with more of a trading background, it could have meant the company was looking to "double down" or overhaul that business, which has been underperforming of late, he added.

"A company can signal where it's going based on who it chooses for executive positions," Wong said in an interview.

For instance, Morgan Stanley signaled that it was increasing its emphasis on retail brokerage with the 2009 announcement that James Gorman, a wealth management executive, would become CEO.

Even though Goldman's strategy is not expected to change, whomever takes over for Blankfein will still need to grow into the role. As part of Goldman's current growth plan, the company is aiming to expand its consumer segment, which has not traditionally been a focus for the company. Some $1 billion of the $5 billion in expected revenue increase is slated to come from its online consumer platform for loans and deposits.

Finding new sources of revenue is an important task for the next CEO because the banking and investment banking business has changed since the financial crisis and made Goldman's traditional model less profitable, RBC Capital Markets analyst Gerard Cassidy said. Industry reform laws and regulations have curtailed Goldman's ability to use leverage as a propriety trading firm to drive revenues and profitability, the analyst explained.

Cassidy said Goldman's 2017 revenue of $32.1 billion was 30% lower than the peak of $46.0 billion it generated in 2007. Return on equity peaked in 2006 at 32.8%; Goldman finished 2017 with an ROE of 10.8% when adjusted for non-recurring items.

"The new CEO will need to drive change even further with increased use of digitalization to drive financial services revenue higher while at the same time managing its existing businesses," Cassidy said in a March 9 report.

Though the timeline is not a certainty, an exit at the end of 2018 might provide Blankfein with an opportunity to leave at a time when the business is performing well. So far this year the operating background has been a constructive one, Sandler's Harte said. The analyst said there has been enough volatility to improve trading activity, but not so much market disruption that it has derailed investment banking business.

"This could end up being a really good year for Goldman Sachs," Harte said. "That could kind of theoretically give Lloyd Blankfein a chance to go out on top so to speak, while also kind of securing the next generation."