(GS) Goldman Sachs Analyst Upgrades Shares to Neutral

We have upgraded our recommendation on The Goldman Sachs Group Inc. (GS) to Neutral from Underperform.

The upgraded recommendation is based on the company’s recent expansions to generate revenue growth, coupled with targeted cost reduction initiatives.

Goldman is on a buying spree. The company has agreed to purchase a 4.8% stake in Mongolia’s Trade and Development Bank. The terms of the deal were not disclosed. Goldman’s stake purchase in the Mongolian bank indicates its plan to gain exposure in the Mongolian economy, whose growth is stimulated by the developing resources of the country.

Furthermore, the company announced its plan to purchase Vermont-based Dwight Asset Management Company. The deal, whose terms are still undisclosed, is expected to close in the second quarter of 2012. The completion of the acquisition would help Goldman to gain significant market share in the defined contribution investment-only business. Moreover, the bank would be able to prosper in defined contribution business and provide more investment plans to facilitate retired people in capitalizing on their retirement savings.

In the current difficult economic and financial conditions, Goldman has taken an internal initiative to identify areas where it can operate more efficiently. The company has targeted about $1.4 billion in run rate compensation and non-compensation reductions and expects to complete them as soon as possible.

Moreover, Goldman is constantly balancing the near-term uncertainties with long-term strategic goals. It plans to hold more capital to protect itself from the current macro uncertainties and be able to stick to the commitment of providing strong relative return to shareholders. The company proposes to invest in attractive regions and businesses to enhance growth and reduce the number of businesses experiencing lower client demand.

During 2011, the operating environment was dominated by macroeconomic concerns, which resulted in subdued client activity. The market was focused on sovereign risk within the Eurozone. The complexities surrounding various economic considerations have created terrific uncertainty regarding the state of the world’s economy, and has resulted in limited confidence among market participants. Therefore, owing to these uncertainties, many of Goldman’s clients have significantly reduced their risk exposure, and thus the activity levels declined consequently.

In December 2011, the Federal Reserve came up with a set of new stringent rules for the largest U.S. banking institutions. Moreover, even stricter rules will be implemented for the companies with over $500 billion in assets like JPMorgan Chase & Co. (JPM), Goldman and Citigroup Inc. (C), as they are restricted from entering credit exposure of not more than 10% with any other bank. Through this rule, the Fed will limit excessive interconnections between banks, and will minimize the chances of risks exposed to a single financial institution as a percentage of the bank’s regulatory capital.

Most of the U.S. bank officials are in opposition of these new rules. According to them, such stringent rules will slow down the economic recovery as holding extra cash will limit the availability of credit in the market and would affect business growth.

Earnings Recap

Goldman reported fourth-quarter 2011 earnings per share of $1.84, significantly surpassing the Zacks Consensus Estimate of $1.46. Moreover, earnings compared favorably with the loss of 84 cents per share in the prior quarter. In spite of the global macroeconomic concerns, results improved sequentially, driven by an increase in investment banking revenues. However, higher operating expenses were on the downside.

For the full year, revenue was $28.8 billion, down 26% from $39.2 billion in 2010. Moreover, this compares unfavorably with the Zacks Consensus Estimate of $29.7 billion.

Though we anticipate Goldman to benefit from its well-managed global franchise, strong capital base and recent investments; regulatory issues including lawsuits coupled with fundamental pressure on the banking sector, are expected to dent the financials of the company in the upcoming quarters.

Goldman currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.

CITIGROUP INC (C): Free Stock Analysis Report

GOLDMAN SACHS (GS): Free Stock Analysis Report

JPMORGAN CHASE (JPM): Free Stock Analysis Report

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