We reiterated our Neutral recommendation on
The Goldman Sachs Group Inc.
), based on the detailed analysis of the company's second-quarter
2012 results. Goldman's earnings per share for the quarter under
review were significantly higher than the Zacks Consensus Estimate.
Amid the deteriorating global markets and European debt crisis, the
results were driven by Goldman's prudent expense management. Yet,
lower client activity levels acted as a headwind for the quarter.
Despite the current difficult economic and financial conditions,
Goldman continues to focus on improving operating efficiencies and
reducing operating expenses. A year ago, the company announced a
$1.2 billion expense initiative and subsequently increased the
amount to $1.4 billion. After meeting that target, Goldman
continues to focus on improving operating efficiencies across the
firm. Currently, Goldman targets about $500 million in additional
annual run rate compensation and non-compensation reductions, which
is expected to be completed by year-end.
The company aims to maintain a strong capital position in order to
instill the confidence of clients, the investors, bank regulators
and stockholders. Sturdy capital ratios depict Goldman's financial
strength. As of June 30, 2012, the company exhibited solid
risk-based capital ratios. Moreover, in mid-April, the company
announced a 31% increase in its quarterly dividend. This reflects
the company's commitment to return value to the shareholders with
its strong cash generating capabilities.
On the flip side, during the second quarter of 2012, global
economic conditions weakened, driven by the decline in real gross
domestic product (GDP) in Europe, while it augmented at a slower
pace in the United States and Japan. After positive developments
during the March quarter, concerns regarding the European sovereign
debt risk mounted due to the political unrest in Greece and
apprehensions regarding the fiscal outlook in Spain and Italy.
These conditions weighed on the investment banking activity,
particularly in equity-related underwriting activity levels.
Moreover, in June 2012, the Federal Reserve came up with a new set
of stringent rules for the largest U.S. banking institutions. This
step was taken to stabilize the U.S. financial system. The Fed
governors proposed capital reserves of 7% of the risk-weighted
assets of the banks. Wall Street biggies to be affected by such
JPMorgan Chase & Co.
Bank of America Corporation
Most of the U.S. bank officials are opposing these new rules. They
are anxious that such strict norms will slow down the economic
recovery as holding extra cash will limit the availability of
credit in the market and would disturb the overall business growth.
We anticipate Goldman to benefit from its well-managed global
franchise, strong capital base and recent investments. However,
regulatory issues coupled with fundamental pressures on the banking
sector are expected to dent its financials in the upcoming
We believe that the risk-reward profile of Goldman is currently
balanced and hence, we have reiterated our Neutral recommendation
on its shares. However, Goldman currently retains a Zacks #2 Rank,
which translates into a short-term Buy rating.
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