Three Pivotal Questions for Goldman Sachs (GS) - UBS

UBS analyst, Brennan Hawken, poses three questions for Goldman Sachs (NYSE: GS) investors. No change to Buy rating or $185 PT. Notes follow:

Is Goldman shifting its business mix back to a greater focus on Equities?

Goldman has actually ceded more share in FICC than European bulge bracket firms despite their extensive restructuring announcements. Will a shift away from FICC lead to greater competition in Equities? The Equities business certainly has less capital intensity than FICC, it does require low balance sheet risk weights, such as PB. PB is a very important business within Equities, as evidenced by the Coalition rankings.

Will a shift away from FICC lead to greater competition in Equities?

Despite all the attention to FICC restructuring, we have seen European bulge bracket firms cede Equities revenue share in recent years given the pressure they are under from the leverage ratio. This is as an opportunity for Goldman, given the strength of their PB and Equities franchise.

Can I&L represent a reliable and sustainable source of revenue?

The I&L portfolio is now 73% debt and loans and generates about $225 million in NII / qtr. This increased focus on lending in I&L naturally calls for more deposit funding (hence the recent GE acquisition). Furthermore, even if Goldman pays a higher rate for its deposits, it is likely cheaper (and certainly stickier) than wholesale funding sources. The analyst expects this more stable lending revenue and funding profile to lead to less volatility in I&L revenue and greater investor comfort with this revenue source.

No change to the $185 price target which assumes GS will trade at roughly 10.5x the 2017 EPS estimate.

For an analyst ratings summary and ratings history on Goldman Sachs click here. For more ratings news on Goldman Sachs click here.

Shares of Goldman Sachs closed at $164.11 yesterday.

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