Goldman Sachs's Blankfein Is `Reasonably Bullish,' Nomura's Schorr Says
Glenn Schorr, an analyst at Nomura in New York, described Goldman Sachs’s view of the market in a note to investors following a meeting with Chief Executive Officer Lloyd C. Blankfein, 56, and Chief Financial Officer David A. Viniar, 55.
Goldman Sachs, the most profitable securities firm in Wall Street history, makes most of its money trading fixed-income, currencies and commodities, known as FICC. Yet it’s the investment-banking business, which includes mergers and acquisitions and underwriting stocks and bonds, that may show the fastest growth next year, Goldman executives told Schorr.
“Goldman remains reasonably bullish on the outlook for investment-banking activity in 2011,” Schorr said. “In fact, Lloyd listed investment banking as the business that he’s most confident in as we close out 2010.”
The firm ranks second to Morgan Stanley among global mergers and acquisitions announced in 2010 and is third after Morgan Stanley and JPMorgan Chase & Co. among managers of equity and equity-linked offerings worldwide this year, according to data compiled by Bloomberg. In a year of record high-yield debt underwriting, Goldman ranks sixth, the data show.
Investment banking accounted for about 11 percent of Goldman Sachs’s revenue in the first nine months of 2010, whereas FICC comprised 51 percent of revenue in the period. Blankfein and Viniar said FICC trading may pick up next year because the market’s view on interest rates and inflation are likely to change at some point, Schorr wrote.
“When changes in perception occur on these fronts, it typically leads to a flurry of activity,” Schorr wrote. In addition, wide day-to-day swings in prices “usually happen before a big turn in the market, which will then lead to a pickup in activity.”
Regulatory changes, such as the Volcker rule’s ban on proprietary trading and new capital requirements, may reduce Goldman Sachs’s return on equity to a number below the firm’s previous peak, Schorr estimated. He said that Blankfein and Viniar didn’t agree that regulations will definitely reduce returns.
“Management feels like there are still a lot of moving parts, so they are not ready to concede that future returns will necessarily be a lot lower than the past,” Schorr wrote.
Goldman Sachs, which had $231 million of Irish government obligations at the end of September, doesn’t face much direct exposure to European sovereign debt problems, Schorr said.
Still, “we do think management has concerns regarding the impact that stresses in Europe could have on the macro economy and funding costs around the globe,” Schorr wrote. “If there was a sovereign restructuring (which we think seems hard to avoid at some point), funding costs would rise around the globe and be a drag on the global financial system,” Schorr said.
He expects the firm to earn $7.65 billion, or $13.10 a share, for the full year, down from $12.2 billion, or $22.13, a year earlier. Schorr’s earnings estimate is below the $8.39 billion, or $13.74 a share, average estimate of 19 analysts surveyed by Bloomberg.
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