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Investment Overview for Goldman Sachs (NYSE:GS)
Below are key drivers of Goldman Sachs' value that present opportunities for upside or downside to the current Trefis price estimate for company's stock:
Bonds, Currencies & Commodities
- Trading Assets for Bonds, Currencies & Commodities : Goldman's FICC operations are its biggest source of revenue. The global bank grew its debt-trading capital from $205 billion at the end of 2005 to $293 billion by 2007. Following the global economic crisis, this figure fell to $246 billion in 2008 before recovering to $290 billion by 2012. If Goldman is forced to shrink its fixed-income business due to increasing pressure from regulators to reduce this risky aspect of its business model, and its FICC trading assets decline by 2% annually as opposed to the 3% growth that we forecast, total assets would fall below $250 billion by the end of our forecast period. This would result in a downside of almost 10% to the Trefis price estimate.
- Yield on Trading Assets for Bonds, Currencies & Commodities: Goldman Sachs' fixed-income trading yields decreased sharply from above 5.5% in 2006-2007 to 1.1% in 2008. It is currently around 4% - significantly below the 9.1% level it scaled in 2009. While we expect yield figures to improve to around 5% over coming years, if yields improve to around 7% over the Trefis forecast period, then there will be a 12% upside to the Trefis price estimate.
For additional details, select a driver above or select a division from the interactive Trefis split for Goldman Sachs at the top of the company page.
Goldman Sachs is a leading global financial services firm with offices in over 30 countries. The company offers investment banking, securities and investment management services to corporate, institutional, government and high-net worth individual clients.
Fixed Income, Currencies and Commodities Trading
Goldman Sachs' trading assets (capital) for bond, currency and commodity trading are almost 150% greater than the company's equity and derivatives trading assets. Additionally, Goldman's yield on bonds, currencies and commodities is roughly the same as that on equities & derivatives. These factors make the bonds, currencies and commodities division more valuable than equities and derivatives.
High Margin Securities Services and Other Investments Business
The margins for Goldman's Securities Services, Equity Commissions & Principal Investments are currently about 1.6x the margins for the Asset Management and Underwriting divisions. These high profit margins help make this one of the bank's most valuable divisions.
Growing Asset Management Business
Goldman's growing assets under management (AUM) between 2005 and 2012 makes the Asset Management division more valuable than the Underwriting division, which has seen a decline in fees as economic conditions have remained uncertain. Goldman will likely have to focus more on its asset management business as new regulations begin to restrict proprietary trading and risk taking, and as such we see the division as a significant value driver for the company.
Increasing Demand for Investment Banking Services in Emerging Markets
With the GDP of many emerging markets such as China and Brazil growing rapidly, there is an increasing demand for capital from companies in these markets to support expansion. Additionally, with the integration of these markets into the global economy, there is a shift in these countries from family-run businesses to global corporations. Accordingly there is an increasing number of companies going public or raising debt capital, driving demand for equity underwriting and debt origination services. Consolidation across different sectors has also been driving demand for M&A advisory services.
Volcker Rule to Affect Proprietary Trading Desks
The Volcker Rule restricts banks from making certain kinds of speculative investments if they are not on behalf of their customers. The rule proposed by former Federal Reserve Chairman Paul Volcker is being argued on the grounds that such speculative activity played a key role in the financial crisis of 2007-2010. The Volcker Rule is expected to be implemented in the near future. Goldman Sachs' proprietary trading desks account for a significant percentage of earnings and, the Volcker rule will significantly curb Goldman Sachs' proprietary trading revenues.
Economic Recovery Should Stimulate the Asset Management Industry
Investors' desire to regain losses that came during the recession could stimulate investments in multi-asset, alternative and equity products, while signs of a broad based recovery in the real estate market would improve prospects in alternative investments.
Long-term trends, including the ongoing shift from state pension dependency to private retirement funding, aging populations in mature markets, and growing wealth in emerging economies, will also positively impact assets under management.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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