We have maintained our Neutral recommendation on
The Goldman Sachs Group
) based on the detailed analysis of the company's first-quarter
2012 results. Goldman's first-quarter 2012 earnings per share were
significantly higher than the Zacks Consensus Estimate. Moreover,
the reported earnings almost doubled the prior quarter's
Amid the improving economy and global markets, the results of
the company were driven by increases in investment banking revenues
and equity trading. Moreover, the results were marked by higher
client activity levels. However, higher operating expenses were on
During the first quarter of 2012, encouraging development
initiatives such as moves taken by the European Central Bank and
other central banks to tackle funding risks for European financial
institutions, as well as progress in resolving Greece's debt
situation, helped the global market conditions to improve.
Fortifying U.S. economic data also contributed to the enhanced
market sentiment, thereby leading to advanced credit markets,
increased global equity markets and declining volatility levels in
Goldman continues to implement the expense reduction
initiatives, which began in the second quarter of 2011. The company
launched an internal initiative to identify those areas where it
can operate more efficiently. The company has largely implemented
its targeted annual run rate compensation and non-compensation
reduction of approximately $1.4 billion and continues to identify
savings opportunities through declines in total staff and planned
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 March 31, 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, recently, the Federal Reserve came up with a
set of new 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.
biggies to be affected by such rules include
JPMorgan Chase & Co.
Bank of America Corporation
Most of the U.S. bank officials are opposing these new rules.
According to them, such strict rules will slow down the economic
recovery as holding extra cash will limit the availability of
credit in the market and would affect the overall business
We anticipate Goldman to benefit from its well-managed global
franchise and strong capital base. However, regulatory issues
coupled with the fundamental pressures on the banking sector are
expected to dent the financials of the company 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. Goldman currently retains its Zacks #3 Rank,
which translates into a short-term 'Hold' rating.
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