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Goldman Sachs Faces Wobbly Global Economy

By    |   Thursday, 12 Apr 2012 01:13 PM

Goldman Sachs (GS), like many large Wall Street banks, is working to keep its revenues growing in a wobbly global economy, even as it attempts to meet a raft of regulatory rules that will require it to set aside capital in case the credit crisis returns. Unsurprisingly, analysts are mixed about the sector and about Goldman.

Goldman Sachs is a major global investment bank, dealing in securities and investment management for a large and varied client base that includes corporations, financial institutions, governments and high-net-worth individuals.

The bank report in four business segments: investment banking, institutional client services, investing and lending, and investment management. At the end of 2011, Goldman had offices in 30 countries and nearly half of its staff worked outside North and South America. The bank earned 38 percent of its revenues from outside the region.

The bank beat earnings in the fourth quarter, coming in at $1.84 per share, well above $1.24 expected by Wall Street. The first quarter consensus is at $3.51 per share.

The earnings consensus on Goldman Sachs for 2012 is $11.75 per share, ranging from $8.90 to $13.56.

Banks are struggling on a number of fronts, including dealing with the fallout from a potential hard landing in China, weakness in Europe as the debt crisis drags on, and the recent poor jobs report in the United States.

Aside from the macro problems, banks are working to meet stringent U.S. and global banking systems rules. “The U.S. federal bank regulatory agencies have issued revised proposals to modify their market risk regulatory capital requirements for banking organizations in the United States that have significant trading activities,” Goldman management told investors recently.

“These modifications are designed to address the adjustments to the market risk framework that were announced by the Basel Committee in June 2010 (Basel 2.5), as well as the prohibition on the use of credit ratings, as required by the Dodd-Frank Act,” managers said. “Once implemented, it is likely that these changes will result in increased capital requirements for market risk.”

The bank must also, by July 1, come up with a means to finance its own dissolution in the event of another credit collapse, what the industry is calling a “living will” for systemically important banks.

“The firm’s resolution plan must, among other things, ensure that GS Bank USA is adequately protected from risks arising from our other entities,” managers said.

Slower economy


Goldman is a $57.37 billion market cap firm in a sector, capital markets, where the average company market cap is $7.72 billion.

Its trailing 12-month P/E ratio is 26.29 compared to 21.22 for the sector. The five-year projected price-to-earnings-growth (PEG) ratio is 1.76, near the sector average.

Projected earnings per share growth for the coming year is 14.76 percent, below the sector average of 17.17 percent.

Analysts seem generally bearish on Goldman Sachs at the moment, with several sell calls, including from Ned Davis Research. 

Goldman, like many on Wall Street, seems to be adjusting to a changing world, write the analysts at Standard & Poor’s Equity Research, in a note dated March 28.

“Given market uncertainties and higher regulatory costs, we believe GS is trying to right-size its infrastructure to conform to a slower global economy,” S&P wrote. “ In our opinion, 2011's fourth quarter highlights management's focus on reducing compensation and benefits to keep them below 40 percent of total net revenues.”

Goldman Sachs will next report on April 17.

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Thursday, 12 Apr 2012 01:13 PM
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