18 January 2012 at 15:17 GMT
The near future looks rough for the New York based global investment bank. The biggest challenge is adapting its business model to the new regulatory reality. Proprietary trading, one of the old bread and butter businesses of the bank, does not provide enough cushion anymore. The substantial fixed income business is facing a completely new set of capital requirements. The greatest fear is that the new capital regime might decrease earnings from these activities to levels below Goldman’s cost of capital which could mean the termination of the business.
Although its earnings are under pressure, Goldman offers a rather hopeful view of the future with signs of recovery ahead. This view is shared by analysts it seems with the consensus pointing to a firm recovery in earnings during 2012, chart 1.
Lower client activity hurts revenue and profits
Overall lower investment banking and trading income has been the theme for most US financials during this reporting season as Mergers and Acquisitions, Equity Underwriting and Debt Underwriting volumes have fallen for much of the year. Because it's one of the leading players Goldman has particularly suffered in these business segments (chart 2).
The lower client activity, although moving in tandem with the lack of economic stamina, is a major threat to Goldman’s profitability in 2012. As the bank managed to stay at the top of the ranks in 2011, Goldman is in a pole-position if client activities recover, which CEO Lloyd C. Blankfein indicates in today’s report.
Capital and liquidity in focus
Furthermore Goldman continues its focus on balance sheet management and liquidity strengthening shown by its level 3 assets which totalled USD 48bn at year end, or 5.2 percent of total assets. The “Global Core Excess Liquidity” (GCE) was USD 172bn at year end compared to USD 166bn average for 2011. Common equity capital was USD 67.3bn.
See the headline numbers
here.