Morgan Stanley Optimistic on Volker's Rule Impact on Goldman
In a report published Monday, Morgan Stanley analyst Betsy Graseck voiced optimism that Goldman Sachs Group (NYSE: GS) 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.
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