Yesterday Goldman Sachs reported strong earnings helped by a huge rebound in the trading business.
Yet outspoken bank analyst Dick Bove of Rochdale Secruties downgraded the firm anyway.
From the note, here’s why he did it:
The unusual step of lowering the rating when raising the estimate is due to the fact that the earlier estimates were simply too low. It appears that trading results will be better than earlier thought. However, it does appear that the long-term earnings power of the company is lower than initially believed.
From a broader standpoint, I now believe that the outlook for overall economic growth is less than previously expected. The U.S. government must take action on its deficit. The regulatory pressure on Goldman is expected to be intense as a consequence of the Senate recommendations that the SEC and the Justice Department look more closely at the firm.
The company’s freedom to manage its assets will be hindered by the regulatory pressure. Until Goldman resolves its broader problems it will be unable to make use of the excess capital and liquidity it has built up on its balance sheet. Further, it seems likely that the company must take some time to re-establish its relationships with clients to assure them that the client in fact does come first at Goldman.
Bove now rates the stock NEUTRAL from BUY.
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