Goldman Sachs Bears The Brunt Of Higher Compensation and Credit Costs: Analyst Cautions On Regulatory Uncertainty

BMO Capital Markets analyst James Fotheringham reiterated an Outperform rating on Goldman Sachs Group GS, with a price target of $421.

The company reported Q3 EPS of $5.47, down from $8.25 a year ago, beating the consensus of $5.31.

Following GS's 3Q23 messy cost miss, the analyst lowered out-year estimates by -2% (higher compensation and credit costs), while maintaining the target price (implying a +40% total return).

GS believes the Basel 3 End-game proposals "go way too far," but related regulatory uncertainty dampens its outlook for 4Q23 share repurchases (down from $1.5 billion buy-backs in 3Q23). 

Fotheringham lowered GS out-year core EPS estimates by -2% in 2024E (to $37.14 from $37.75) and -2% in 2025E (to $41.27 from $42.25) due to higher than previously modeled compensation and credit costs.

On the positive side, the analyst believes GS can sustain low-teens RoTE, given ongoing tailwinds from share gains in core GBM (and eventual normalization of capital markets activity), improving the profitability of higher growth adjacencies (e.g., Transaction Banking), alongside ongoing capital and funding optimization.

The analyst thinks GS's "through-the-cycle" targets are still ambitious; however, Fotheringham is particularly encouraged by the progress shown this quarter to narrow management's strategic focus (sale of GreenSky, Marcus loans, Personal Financial Management, and various principal investments). 

As such, the analyst raised the near-term estimates by +7% in 2023E (to $27.68 from $25.95) due to higher GBM fees.

Price Action: GS shares are trading lower by 2.08% to $302.91 on the last check Wednesday.