The financial services industry is one of the most widespread and established industries in the global economy. All companies who have sales from the management of money for either individuals or institutions are included under this umbrella. In the United States alone, according to the Census Bureau 2007 industry report, it included 503,156 establishments, had approximately 6.6 million employees, and had revenues of 3.6 billion dollars. Financial services used to be a safe haven for conservative investors who thought the stocks provided higher than normal dividend yield, stable performance and revenues and some defense against volatility. Within the last decade however, the collapse of global financial economy due to the subprime market and derivatives market falling apart has led to more careful involvement in this industry. Moreover, greater regulation in both the U.S. and overseas has led to more controlled administration of many companies in this industry. This industry is also extremely susceptible to the waves of the economic cycle. The most opportune time to buy is during economic recessions since financial service companies tend to rise out of recession rather fast because interest rates are usually relatively low. Financial investments are typically undervalued during recession when stock prices are low.
Collapse of the Market
Although once considered a conservatives market 2008 and 2009 saw a shift in this thinking due to major issues arising in the financial services industry. Although a long-standing crisis of almost a decade, the collapse of the global economies came when in June 2007 Bear Stearns announced to the world that two of its major hedge funds, totaling in over three billion dollars, were failing. The disaster of these companies arose because they were cripplingly invested in the derivatives market based on the US subprime mortgage market. Additionally in September of 2008 Lehman Brothers, a U.S. investment bank, folded as well. Their meltdown gave headway to the issue of how interlocked and intertwined debt had become in this industry. Liquidity and credit quickly froze globally. Since that market crash international
governments have focused on trying to regularize the financial system by putting money into the economy and bailing out banks.
Since the crash banks and financial institutions have had more difficulty raising money and higher quality capitol. Furthermore, a important detail of the crash had to do with global trade imbalance, those of which are a key feature of the global economy. The emerging economies of rising countries such as China and India helped to finance the credit and housing bubbles that emerged in the United States and Europe. Since these countries continue to expand and grow they bring with them large capitol inflows into western economies. Another issue that the crash brought to light was the scandals from the financial institutions themselves. Goldman Sachs was accused of defrauding investors by failing to disclose conflicts of interest between with of its clients, Paulson & Co., and it’s investment decisions in their mortgage portfolio. Goldman Sachs was not the only financial services company to be caught up in scandal however, the sovereign debt crisis in Europe threatened the European banking system and over shadowed the gossip of companies within this industry.
Outsourcing has been one a fast growing trend in the market within the last decade. However, apprehensions about data and security issues, increasing and hidden costs, and revived interest in American employment and quality are leading companies back to the United States. Many firms, especially within the financial services industry, are reverting back to operating in the U.S. This should quickly increase in 2013. Operating Excellence
Cross line-of-business service models can grow a company many benefits however operating structures have been put on the back burner because of the pace of business strategy and regulatory change. Very few companies have shifted from coordination to standardization, which may lead them higher profits. Since many company structures are very set, it is complex to change the architecture of a company quickly. However since companies are getting
used to government regulation after the crash, they can now focus on open source thinking and operating structures to increase revenues. The Experience economy
Costumer experience is quickly becoming a key component to differentiation for financial services companies. Technology and business models are constantly changing to customer demand and now these same companies are coming to terms with the fact that the product is no longer the key differentiator. The sustainable competitive advantage comes from customer experience. Companies are expanding both their technology and their company culture to give consumers better access to great experience. Increasing Yield
A strategy that has been implemented by central bankers in recent years is to add money into capitol markets to keep interest rates low and garner interest from riskier investors focused on yields. This increases junk and frontier bonds. Nevertheless well-established firms will stick with their well tested strategies and high performance instead of going after high and risky returns. Look for jump start companies in the financial services industry to take higher risk propositions and reputable companies to maintain their status quo. ETFs
In the beginning of 2013 there were less than 100 ETFs. However, because the SEC removed regulation obstacles, money managers are making plans to get their ETFs to the market as soon as possible. Giving buyers more choices and then potentially lowering costs and finding more flexible solutions are positive consequences of this increase in ETFs.
Since the near collapse of global markets within the last 5 or so years, regulation has been at an all time high. In the United States, the consumer financial protection bureau has appeared to control financial services firms and products by focusing on mortgages and loans. Since many governments feel that regulation has helped get the global economy back on its feet, there is no indication that there will be much if any deregulation in sight.
Although there are many companies in the financial services industry, Goldman Sachs has only a few direct competitors that can plausibly contest their industry lead standing. JP Morgan Chase & Co., and Morgan Stanley are two of their toughest competitors in the United States. Both companies beat market estimates easily. Morgan Stanley has started to focus more on wealth management rather than investment banking. Although many analysts believe that currently the only banking sector doing well is investment banking. Additionally, underwriting has gone up almost 30% and mergers and acquisitions have gone up more than 20%, both of which hurt companies such as Morgan Stanley, Shwab, and Merril Lynch. Furthermore, due to the slowing of mortgage financing and limited demand for loans, there is a decrease in revenue for major mortgage banks including JP Morgan.
Within its industry Goldman Sachs continues excellence due to it’s strong client management. The stress put on effective management of capitol and regulating expenses is shown across its business. In addition, many smaller financial services companies are withdrawing from Wall Street in 2013 simply because they cannot compete with the capitol power of the major market players.
Direct Competitor Comparison| |
| GS| JPM| PVT1| MS| Industry|
Market Cap:| 66.66B| 178.99B| N/A| 40.36B| 997.91M|
Employees:| 32,000| 255,898| N/A| 57,061| 30.00|
Qtrly Rev Growth (yoy):| 0.01| 0.01| N/A| 0.18| 0.47| Revenue (ttm):| 34.30B| 90.84B| 27.32B1| 27.38B| 90.52M| Gross Margin (ttm):| 0.91| N/A| N/A| 0.87| 0.53|
EBITDA (ttm):| N/A| N/A| N/A| N/A| -575.82K|
Operating Margin (ttm):| 0.36| 0.36| N/A| 0.17| 0.26| Net Income (ttm):| 7.37B| 21.43B| 290.00M1| 1.09B| N/A| EPS (ttm):| 14.49| 5.60| N/A| 0.53| 2.04|
P/E (ttm):| 9.58| 8.43| N/A| 38.68| 13.71|
PEG (5 yr expected):| 1.46| 1.18| N/A| 1.93| 1.97|
P/S (ttm):| 1.94| 1.95| N/A| 1.45| 11.02|
JPM = JPMorgan Chase & Co.|
Pvt1 = Merrill Lynch and Co., Inc. (privately held)|
MS = Morgan Stanley|
Industry = Diversified Investments|
1 = As of 2012 |
The three most advantageous strengths that Goldman Sachs has is their position as a global market leader, their international reach, and their talent and business relationships. Earning a market leading position means that they generally have higher margins, revenues and benefits, along with the capability to raise debt at a lower cost. They also tend to be more stable than their competitors. Having international reach gives them the advantage of working with companies that are international and companies based internationally giving them access to a much larger network. Lastly, though the economic meltdown has affected many companies, Goldman Sachs has held tight to its highly talented staffing and maintained it’s business relationships, thus preserving its rock solid foundation. Weaknesses
A main weakness that Goldman Sachs unfortunately possesses is that it is concentrated in a few key products. This becomes risky because if one or more of their products goes under, it may take out the whole company. Another weakness they have is their high attrition rates. Although they hire the best and most talented people they often leave with the know how of the company for better jobs and opportunities. Hiring new employees means not only spending more money on training but also wasting valuable time finding the right niche for them in the company. Opportunities
There are many opportunities for Goldman Sachs presently. Even though they
already have international reach, there is opportunity to expand further. A strong international presence will increase growth and profit, expand the customer base, and lead to more stability. Also the emerging markets profit significant prospect to expand products to developed countries, while bringing in new sources of capitol. Another major opening is the economic slowdown and competitor banckruptcies which should help to eliminate some of their competition. This means that all the companies who can avoid bankruptcy, as Goldman Sachs should be able to do, will have increased profit margins. Less competition also means that there will be more money and higher prices. Threats
Although the credit market crisis peaked in 2008, it is still an issue for firms to deal with. The cost of borrowing increases, which lowers margins and limits the free cash flow to shareholders. This coupled with mortgage issues could have prove to be very damaging to firms in this industry. Since mortgage loans are worth their not what it was purchased for but rather an unknown value, this increases uncertainty risk, increases discount rate for future cash flows and decreases stock value. Lastly, to attempt to stop inflation, the threat of a high rise in interest rates could strangle the profit margins of a business quickly, especially if they rely on raising money to finance expenses. Since the financial sector profits from borrowing low and lending high, this would particularly hurt this industry.
Porters Five Forces Analysis
Bargaining Power of Suppliers
For Goldman Sachs their suppliers have little bargaining power because inputs are not a large part of costs. Therefore the firm will have long-term positive impact due to this, adding value to the company. Bargaining Power of Customers
Fortunately for Goldman Sachs the customer base is extremely large and the product is tremendously valuable to them. Sincere there are so many customers generally no single one has customer has much bargaining leverage. Also, because the product carries such significance they are willing to pay a higher price, which is good for the firm. Intensity of Existing Competition
The financial sector is a large industry which allows for many companies to exist without diminishing too much of the market share from each other. For Goldman Sachs, having many competitors is not necessarily a positive prospect, however having an industry large enough to handle so many firms balances out that negative. Moreover, government regulation limits the competition to an extent and the United States government has been heavily regulating since the recent crash. Threat of Substitutes
The major threat of substitute occurs when contemplating alternative investment sources. However, Goldman Sachs is a dominating player in its market. This is especially the case because although mutual funds and hedge funds have given way for investors and individuals to receive higher returns and invest more heavily, they do not have the same level of customer satisfaction. Goldman Sachs prides itself on going above and beyond in creating products and services specifically suited for it’s clients, and making the ultimate customer experience. Threat of New Entrants
New entrants in the financial services sector are very limited. High capitol requirements severely affect the plausibility of a company entering this market. Moreover, high sunk costs dissuades firms from entering because there is such a large up front cost with no guarantee for revenue in the future. Lastly, because companies such as Goldman Sachs have such strong brand names their customers tend to be extremely loyal, thus leaving little new customer base for new entrants.