Breakingviews: Keeping an eye on Wall Street's love for Goldman Sachs

Published Thu, Jul 13 20173:58 PM EDTUpdated Thu, Jul 13 20175:00 PM EDT

Breakingviews

Antony Currie

Long-term optimists in the analyst community are giving Goldman Sachs too much credit. Slow trading across the investment-banking industry may doom the $90 billion firm to another ho-hum set of quarterly results next week. But analysts reckon its profit growth over the next 18 months will far outpace Wall Street rivals. Goldman, led by Lloyd Blankfein, is expected to earn $1.4 billion for the three months to the end of June, according to estimates compiled by Thomson Reuters. That equates to an annualized return on equity of just 7.7 percent, weaker than the 8.9 percent showing, after stripping out accounting gains, that the firm managed in a dismal first quarter. More from Breakingviews : Why Europe can't beat Google on corporate taxes Bank of America, Citigroup and JPMorgan have already warned investors that trading revenue from April to June will turn out up to 15 percent lower than in the same period last year. Goldman's trading has lately tended to be more erratic than competitors'. That has raised the question of whether the firm's decision to make only relatively minor tweaks to its strategy, compared to others in the sector, is the right call. Yet analysts are factoring in a golden period for Blankfein's firm. In next year's fourth quarter they expect net income to reach a level 63 percent higher than their estimates for the most recent quarter. Express that in earnings per share, and the boost is over 80 percent from this year's second quarter. That's more than double the growth anticipated from second-placed Bank of America and the next group comprising Citi, JPMorgan and Morgan Stanley. Granted, regulators are allowing Goldman to return more capital to shareholders. Any tax cuts President Donald Trump's administration manages to pass would help, too – but the same applies to all banks. Even allowing for a boost from usually lower fourth-quarter compensation costs, the expected extent of Goldman's outperformance looks overdone. With its stock trading at 1.23 times book value, investors may be even more optimistic about Goldman's prospects than analysts. That ratio suggests Goldman will do better than the 11.5 percent annualized return on equity implied by earnings forecasts for the final three months of 2018. The likes of JPMorgan, which along with Citi and Wells Fargo will report its second quarter on Friday, might reasonably feel under-appreciated. For more independent commentary and analysis from Reuters Breakingviews, visit breakingviews.com

Lloyd Blankfein, CEO and Chairman of Goldman Sachs.

Adam Jeffery | CNBC

Goldman, led by Lloyd Blankfein, is expected to earn $1.4 billion for the three months to the end of June, according to estimates compiled by Thomson Reuters. That equates to an annualized return on equity of just 7.7 percent, weaker than the 8.9 percent showing, after stripping out accounting gains, that the firm managed in a dismal first quarter.