Morgan Stanley Optimistic on Volker's Rule Impact on Goldman

In a report published Monday, Morgan Stanley analyst Betsy Graseck voiced optimism that

will “manage through” the Volker Rule's impact. The analyst began her analysis emphasizing that Morgan Stanley has Goldman Sachs exiting non-Volker investments by 2020. Graseck noted that if Goldman withdrew these investments by 2014, EPS would fall 2 percent and ROE would decline 20bp if the company can buyback stock equivalent to the funds tied up in non-compliant investments. If Goldman cannot achieve that level of buyback, EPS could drown 8 percent with a 90 bp hit to ROE. Morgan Stanley added that Goldman will likely reach the 5 percent SLR minimum by 2018 given the 4.2 percent ratio due to numerous levers. Graseck commented, “Levers include: 1) issue more preferreds, we model issuance worth 15 bp by 2017, 2) manage down CDS notionals, which we estimate is currently an 80 bp hit to SLR due to $250b denominator gross-up, 3), shrink the repo book, which is about $260b in size, or ~80bp hit to SLR.” The analyst models Goldman Sach's SLR at 4.7 percent in the fourth quarter of 2015 and 5 percent in 2016. Morgan Stanley rates Goldman Sachs Group as Equal-weight due to industry headwinds and great upside potential. The analyst has a $185.00 price target on Goldman, but noted that the 17 percent upside falls to 13 percent if they cannot buyback the stock. Shares of Goldman Sachs closed at $157.44 on Thursday.