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Goldman Sachs working to widen depository i-banking coverage

Goldman Sachs & Co. LLC is looking to widen the scope of its depository coverage to help meet a goal of adding 1,000 new investment banking clients across a number of sectors.

The additional coverage means Goldman Sachs will have to cover relatively smaller institutions, since it already counts big banks among its clients, according to a source familiar with the matter.

However, the bank is not expected to venture too far downstream. Goldman Sachs is aiming to cover some middle-market banks, according to three investment bankers who do not work at Goldman Sachs but are aware of the plans. One of the people said the plan is to cover the "upper middle market."

In recent years, Goldman Sachs' bank clients have tended to have at least $10 billion in assets. In 11 M&A advisory assignments since 2013, all but two featured bank clients with $10 billion in assets upon deal announcement, and the average size of the clients was just under $23 billion in assets, according to S&P Global Market Intelligence data. In book manager underwriting assignments, Goldman Sachs' bank clients are often bigger, with most pushing above $50 billion in assets.

But Goldman Sachs wants to bring on more depository coverage as it works to add 1,000 new investment banking clients. The company hopes greater coverage in the different sectors can generate $500 million in additional revenue by 2020, according to a plan Goldman Sachs unveiled in September 2017.

While a hiring effort to grow the financial institutions coverage has been underway, the most notable recent personnel news from the depository team has been the expected departure of Huntley Garriott, the co-head of banks and specialty finance who is leaving to become president of Live Oak Bancshares Inc.

But Goldman has made some bank coverage team hires in 2018.

The company added vice presidents Mari Oishi, who was previously with RBC Capital Markets LLC, and Ryan Doyle, who was previously with Citigroup Global Markets Inc. Adding more senior-level investment bankers has been part of the search. Goldman Sachs is expected to add two managing director-level calling officers, according to the same investment banking sources.

Goldman Sachs' investment banking pedigree can help with recruiting. But the company does face some challenges with the expansion. In the bank space, the competition for recruiting is stiff because other investment banks are eyeing wider depository coverage, the people said.

Some investment banks that previously had less exposure to the depository sector have already moved to add senior talent. Lazard Ltd is adding Henry Michaels and Dimitar Karaivanov from RBC Capital Markets, and Jerry Wiant, who was also with RBC, joined Lazard in 2017. Jefferies LLC is expected to add Aaron Packles, the former head of depository and specialty finance investment banking at Bank of America Merrill Lynch. In 2017, Evercore Inc. added former UBS Securities LLC and Goldman Sachs investment banker Tannon Krumpelman to lead the company's banks and specialty finance coverage, and Moelis & Co. added Trevor Montano to cover regional banks and nonbank lenders.

Investment banks want to grow their depository coverage because they believe the improving economy, rising interest rates and loosening of regulations have improved the dealmaking outlook for the industry. Recently signed banking regulatory reform could create more M&A deals among bigger banks in particular. The law increases the asset threshold for systemically important financial institutions to $250 billion from $50 billion, and the change will give institutions more leeway to grow through acquisitions before facing heightened regulatory scrutiny and limitations on capital deployment.

Along with facing the competitive hiring environment, Goldman Sachs must also convince recruits it will remain dedicated to working with smaller companies. Many in the industry believe larger firms will quickly and suddenly abandon efforts to move downstream if the plan fails to generate enough revenue.

But the highest-ranking officials at Goldman Sachs have signaled that the company is committed to growing its investment banking coverage. President and COO David Solomon spoke about the initiative during a May 31 investor conference presentation, and Chairman and CEO Lloyd Blankfein highlighted the plan in a letter to shareholders in the bank's most recent annual report.

In the letter, Blankfein noted that in 2017 the company's market share on transactions with a value less than $5 billion was just over 10%, compared to a share of about 50% on $5 billion-plus transactions. Blankfein said it is worthwhile to pursue the $5 billion-and-below transactions because the deals tend to have fewer advisers and provide substantial financing opportunities.

Of late, Goldman Sachs has been active on bank deals in the $1 billion-to-$5 billion range, landing spots on seven of the 21 pending or completed transactions of that size announced since 2013. A larger team dedicated to the space could help the company take even more market share on those deals.