Goldman Sachs Analysts Decide Bank Slowdown Isn’t Temporary

 

New bank regulations and capital requirements are “structural” changes to the industry that are more to blame for declining profits than the U.S. economic slump, Goldman Sachs Group Inc. (GS) analysts said.
“The operating environment is unlikely to change any time soon, and we see shareholders of challenged banks becoming more demanding in asking management teams to lay out a path to unlocking value in the near term,” analysts led by Richard Ramsden in New York wrote in a report published today.

Their view contrasts with Goldman Sachs Chief Executive Officer Lloyd C. Blankfein, who said in November, “I don’t think we can conclude that the slowdown is secular rather than cyclical change.” Goldman Sachs, based in New York, is the fifth-biggest U.S. bank by assets.

More than half of the top 25 U.S. banks aren’t earning enough to cover their cost of capital, leading to stock prices that are “significantly lagging previous global recoveries,” according to the note. “The vast majority of the reduction relative to pre-crisis levels is attributable to structural issues like deleveraging and regulatory reform.”


Morgan Stanley, the sixth-biggest U.S. bank, and similar firms could improve returns by shrinking businesses like fixed- income trading and distressed-mortgage investing that require high levels of capital, according to the note. Using that capital to buy back shares instead “could be meaningfully accretive to shareholders,” the analysts wrote.

Bank Conversions

Goldman Sachs and Morgan Stanley (MS) were the biggest U.S. securities firms before converting to banks in September 2008.

Citigroup Inc. (C), the third-biggest U.S. lender, could spin off about $100 billion of U.S. mortgages into a new company to boost profit and improve its share price, the analysts wrote. The loans are in the Citi Holdings division, which CEO Vikram Pandit created for the firm’s unwanted assets in 2009.
Shareholders could choose to own stock in the new firm, which would be funded by a loan from the New York-based lender, the analysts wrote. The move could help to increase the bank’s “theoretical valuation” to $50 a share from about $30 a share today, said the analysts, who reaffirmed their buy rating on the company.

‘Eliminate Assets’

“The most efficient way to boost returns -- and create value for shareholders -- is to eliminate assets with both the largest losses and largest capital requirements,” according to the note. “While we recognize the challenges for Citigroup given the size and complexity of the portfolio, the North America mortgage book within Citi Holdings fits the bill for both.”

The note raised Goldman Sachs’s recommendation on Regions Financial Corp. (RF), the 10th biggest U.S. bank by deposits, to conviction buy from buy because the analysts estimate the Birmingham, Alabama-based lender’s shares could increase 35 percent if it cuts branches or sells businesses. They lowered San Francisco-based Wells Fargo & Co. (WFC), the U.S. bank with the biggest market value, to buy from conviction buy because the stock has outperformed rivals recently, according to the note.

To contact the reporters on this story: Christine Harper in New York at charper@bloomberg.net; Donal Griffin in New York at dgriffin10@bloomberg.net
 
To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

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