Goldman Sachs Group Inc. GS +0.26% is building an in-house bank to lend money to wealthy people and companies, in a significant shift that underlines the harsh business climate facing Wall Street since the financial crisis.
The New York securities firm, known for its aggressive trading and big corporate deal-making, is ramping up its activities to become a private bank to serve wealthy customers around the world. The new unit will also lend more directly to corporations, some of whom already make investments and do business with Goldman. Executives have set a goal of $100 billion in loans, up from $12 billion at the end of March.
While Goldman says its financial investment in expanding its bank is a modest one, its ambitions represent a huge change of heart among the managers of the 144-year-old firm, including Chairman and Chief Executive Lloyd C. Blankfein.
Goldman has long been almost synonymous with Wall Street's swashbuckling style and big bonuses, largely from businesses like trading and investment banking. Now, buffeted by a wave of new regulations, market turmoil and a sluggish global economy, revenue in these traditional powerhouses has fallen.
The new bank is a part of Goldman's cautious strategy to reshape its business. But the modest income from interest on mortgages and other loans likely won't come close to replacing the profits lost elsewhere.
The banking push, which hasn't been previously disclosed, will give Goldman more deposits—a source of low-cost funding less vulnerable to the vagaries of financial markets. Like other investment banks, Goldman currently funds most of its activities by borrowing cash against its store of securities holdings, a strategy that left it dangerously exposed during the 2008 turmoil.
At the height of the financial crisis, U.S. regulators forced Goldman and rival securities firm Morgan Stanley to become bank-holding companies to access emergency funds from the Federal Reserve. The goal was to fend off panic that the funding they needed might dry up in the wake of Lehman Brothers Holdings Inc.'s collapse.
Mr. Blankfein welcomed the access to emergency loans but initially had no interest in commercial or retail banking. After the crisis eased, some Goldman executives even discussed trying to renounce the firm's bank-holding company status. But that idea is a nonstarter with the Fed and lawmakers, which have deemed Goldman important to the financial system.
"We're a bank. It's not a hypothetical," said Mr. Blankfein in an interview. Goldman "backed into a big opportunity. We have the regulations. We have the costs. We have the burdens. Now we're dealing with a new sheet of paper [and] looking at the revenue versus the incremental costs, not the sunk costs," Mr. Blankfein said. "It is a no-brainer that we'll build our banking business."
Goldman's powerful management committee has embraced the in-house bank. At weekly meetings of the 30-member group, the executives also have recently debated how to set priorities for the company's own investments, ways to improve Goldman's struggling asset-management business, and how to cope with tougher regulations and competition world-wide, Goldman executives said.
Goldman has no plans to open retail branches, build a network of automated teller machines, pitch credit cards or "give away toasters," Mr. Blankfein said.
Instead, the firm is revving up its lending to Goldman's wealth-management clients and other wealthy individuals. Rather than merely advising them on where to invest and offering investment funds, Goldman is now starting to collect their cash in the form of deposits and make loans to them for homes, art, boats and the like.
As of March, the company's banking operation had $49 billion in deposits, up 48% from the end of 2009.
For its wealthy investing clients, "it's a private bank," Mr. Blankfein said. "We can afford to do that because we have the contacts and the balance sheet."
In that realm, Goldman is joining the ranks of competitors such as J.P. Morgan Chase JPM -2.72% & Co. or Bank of America Corp., BAC -0.13% which house private banks within their larger financial institutions. This type of bank offers more intensive service and advice than typical retail banks, and they have requirements that clients have minimum amounts of money.
In addition to making personal loans to clients, Goldman will make loans to companies that the bank unit will keep on its balance sheet. Many of Goldman's corporate clients have said they used to get more loans from European banks that have recently pulled back, said Goldman executives.
Since the financial crisis, the outlook for traditional Wall Street businesses such as sales and trading and investment banking, which helped Goldman muscle its way to $45.99 billion in net revenue and $11.6 billion in profits in 2007, has darkened. Last year, Goldman took in $28.8 billion in revenues, and $4.4 billion in profits.
On Tuesday, analysts expect Goldman to report earnings per share of about $1.12 for the second quarter, down 39% from the year-ago period. The company's stock price is languishing near $94, a fraction of its all-time high of $248 in 2007.
The banking operation is led by Esta E. Stecher, one of Goldman's top lawyers and one of its highest-ranking female executives. Goldman also has moved several important risk-management employees to the bank.
To date, Goldman's banking unit has about $100 billion in assets, or nearly 10% of Goldman's total assets. About half of the bank's assets are in the form of derivatives instead of loans. Goldman parked them there after the financial crisis. Derivatives are trading instruments whose value is derived from another investment or security, rather than loans.
As of March 31, Goldman Sachs Group had $951 billion in total assets.
The in-house bank isn't likely to overshadow the traders and investment bankers who dominate the corporate culture. Company executives expect only modest returns by the bank. But Goldman's sales and trading businesses have been weak because investors have been shy for nearly two years about making bets in volatile markets.
The deal-making business has suffered because corporate chiefs are nervous about putting their cash to work while the economy remains weak.
Rules that stem from the U.S. Dodd-Frank overhaul, including the Volcker rule, which limits the gambles a bank can take with its own money, and international capital rules that dictate how much risk Goldman can take on, are crimping the firm's ability to make profits in its trading business, executives say.
"It is difficult to make radical decisions when the rules of the game are being revised by regulators on both sides of the Atlantic and no one can confidently say how market and competitive conditions will change as new regulations are rolled out," said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York.
"This whole industry is trying to get where it is supposed to be ahead of it, and we're no exception," Mr. Blankfein said in the interview. "We have to be right."