A plan by Wall Street firm Goldman Sachs Group Inc. (GS) - Get Report to morph itself into a major lender, shifting away from its historic reliance on trading and investment banking, is too little too late, according to longtime bank analyst Dick Bove.
Bove, who works for the brokerage firm Vertical Group, cut his recommendation on Goldman Sachs shares to "sell" on Monday. Previously Bove had urged investors to hold onto the stock if they already owned it.
Goldman Sachs CEO Lloyd Blankfein failed to understand big changes that took place on Wall Street in the years after the financial crisis, Bove wrote in a report to clients. Those included a shift by investors toward index and exchange-traded funds from actively-managed mutual funds.
"Goldman Sachs absolutely refused to change its business model, and the business model is falling apart," Bove said in a telephone interview.
Goldman declined to comment. While the firm's shares have climbed 21% to $239.81 since Donald Trump's victory in the 2016 presidential race spurred bets that lenders would benefit from tax cuts and looser regulations, that gain is the smallest among Wall Street investment banks.
The company's powerhouse trading division has performed worst among peers in each of the past three quarters. While executives have blamed the cold streak partly on unusually calm markets that have sapped trading activity, they announced a plan in September to make more loans to corporations, as part of a broader effort to boost firmwide revenue by $5 billion in three years.
"This is the right move, but Goldman is buying its way in," Bove wrote in the note.
Bove worries that the Wall Street firm will make too many loans to borrowers with low credit scores, boosting short-term profit through high interest rates but increasing the risk of losses in the future.
Goldman Sachs also could face losses in the fourth quarter due to its Venezuela-related investments, Bove warned. President Nicolas Maduro called last week for the nation to restructure its foreign debt.
Blankfein should be replaced, and the Wall Street firm should seek "outside blood" to shake up an outdated corporate strategy and culture, Bove wrote.
"Why is this guy such a hero?" Bove said in the interview. "He totally missed the big change in his industry, and his company is now scrambling to make loans."
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Editors' pick: Originally published Nov. 7.