New bank regulations and capital requirements are “structural” changes to the industry that are more to blame for declining profits than the U.S. economic slump, Goldman Sachs Group Inc. (GS:US) analysts said.
“The operating environment is unlikely to change any time soon, and we see shareholders of challenged banks becoming more demanding in asking management teams to lay out a path to unlocking value in the near term,” analysts led by Richard Ramsden in New York wrote in a report published today.
Their view contrasts with Goldman Sachs Chief Executive Officer Lloyd C. Blankfein, who said in November, “I don’t think we can conclude that the slowdown is secular rather than cyclical change.” Goldman Sachs, based in New York, is the fifth-biggest U.S. bank by assets.
More than half of the top 25 U.S. banks aren’t earning enough to cover their cost of capital, leading to stock prices that are “significantly lagging previous global recoveries,” according to the note. “The vast majority of the reduction relative to pre-crisis levels is attributable to structural issues like deleveraging and regulatory reform.”
Morgan Stanley (MS:US), the sixth-biggest U.S. bank, and similar companies could improve shareholder returns by shrinking businesses like fixed-income trading and distressed-mortgage investing that require high levels of capital, according to the research note. Using that capital to buy back shares instead “could be meaningfully accretive to shareholders,” the analysts wrote.
Goldman Sachs and Morgan Stanley were the biggest U.S. securities firms before they converted to banks in September 2008.
The note also raises Goldman Sachs’s recommendation on Birmingham, Alabama-based Regions Financial Corp. (RF:US), the 10th biggest U.S. bank by deposits, to “conviction buy” from “buy” because the analysts estimate the company’s shares could rise 35 percent if it cuts branches or sells businesses. They lowered San Francisco-based Wells Fargo & Co. (WFC:US), the U.S. bank with the biggest market value, to “buy” from “conviction buy” because the stock has outperformed rivals recently, according to the note.
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