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Bernstein Issues Rare Goldman Sachs Downgrade

The investment bank is facing “deep structural impairment,” noted analyst contends.

  • Thomas W. Johnson

For more than a decade Sanford C. Bernstein & Co. analyst Charles (Brad) Hintz has been consistently bullish on Goldman Sachs Group.

Not anymore.

On June 30 Hintz, a 12-time member of Institutional Investor’s All-America Research Team in the category of Brokers, Asset Managers & Exchanges, downgraded the New York-based investment bank from outperform to market perform.

“We had not anticipated the effect of the regulatory response to the financial crisis,” the analyst wrote in a note to clients. “Basel III capital rules, the Volcker Rule, lower leverage limits, funding policy changes, onerous stress tests and potentially the European ring-fencing requirements are all changing the way the firm operates around the world.”

Goldman is “heavily weighted to sales and trading, especially [fixed income, currency and commodities],” he added. “While we still have confidence in management and consider it best in class in the industry, we cannot get around the fact that sales and trading is facing deep structural impairment and will likely not get back to its previous highs.”

In mid-April Goldman announced diluted earnings per common share of $4.02 for the first quarter, down from $4.29 for the same period one year earlier. Net revenues for client execution in FICC slid 11 percent, to $2.85 billion, and in equities 17 percent, to $1.6 billion, the firm reported.

Hintz says he is still upbeat about the bank’s long-term prospects. “Once the competitive landscape has adjusted and marginal players exit, we believe Goldman Sachs will be one of the winners,” he adds.

But he anticipates trouble in the near term. More than five years after the bankruptcy of Lehman Brothers Holdings, none of the trading units at global banks are generating returns above their cost of capital — and Goldman’s is generating standalone ROE of less than 8 percent, he points out.

“Over the next two years Bernstein has difficulty projecting trading returns above the cost of capital at Goldman Sachs,” contends Hintz, who has been voted No. 1 in the sector three times since 2002 and is currently ranked third.

Goldman will announce its second-quarter earnings at 9:30 a.m. on Tuesday, July 15, and host a conference call later that morning to discuss those figures. Its shares are down about 5 percent year to date through June after surging 34.6 percent in 2013.