UBS Downgrades Goldman On Slump In Trading Revenues

July 24, 2017
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UBS Downgrades Goldman On Slump In Trading Revenues

The knives are out early this morning among the brokers, where UBS – hardly the embodiment of ibanking and sales and trading health these days – just downgraded Goldman Sachs to Neutral, cutting its price target from $250 to $235, on the recent disappointing results from the company’s FICC group. UBS said it believes the market is pricing in an “inflection” in Goldman’s trading revenue despite the recent weakness suggesting a recovery is needed to justify 2018 consensus estimates. The bank concedes that “recent weak results could rebound but believe a recovery in trading revenues would need to be substantial as we estimate a roughly 25% rebound in FICC revenues is implied in 2018 consensus estimates.”

It adds that “while trading could rebound, that has not happened over the past year for GS absent a surprise event such as Brexit or the Trump election and we have difficulty relying on such an event in order to justify a bullish thesis.”

As a result, UBS has “limited confidence” in a FICC rebound at Goldman and sees better opportunities for investors elsewhere, such as Morgan Stanley (and why note even UBS shares).

From UBS:

Shares seem to reflect a rebound in revs but we have limited confidence in that

We are downgrading GS shares to neutral as the market seems to be pricing an inflection in their FICC revenues despite the recent weakness, suggesting a recovery is needed to justify 2018 consensus. We believe there are better opportunities for investors (such as buy-rated MS). Importantly, adjusting for unusual items (ie low taxes, excess I&L, etc) 1H17 earnings missed consensus forecasts as of mid-Feb 2017 (before revisions began) by 19.2%, yet the stock is down by 12.1% and consensus 2018 estimates are only down 7.2%, suggesting to us that the street is largely willing to embed a recovery in GS, trading results.

We recognize recent weak results could rebound but believe a recovery in trading revenues would need to be substantial as we estimate a roughly 25% rebound in FICC revenues is implied in 2018 consensus estimates. While trading could rebound, that has not happened over the past year for GS absent a surprise event such as Brexit or the Trump election and we have difficulty relying on such an event in order to justify a bullish thesis.

(Why?)

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