Over the weekend, Goldman Sachs (GS) settled a financial-crisis related lawsuit with the Federal Housing Finance Agency for $.12 billion. Despite that settlement, however, Credit Suisse analysts Christian Bolu and Ashley Serrao don’t think Goldman’s legal troubles are over. They explain why:
Reuters Despite this settlement, we expect regulation/litigation costs to remain a drag on earnings in the near to intermediate term. That said, capital impact should be manageable given healthy buffers to minimums (CET 1 of 9.8% vs. min. requirement of 8.5%). Goldman Sachs currently estimates the upper end of the range of “reasonably possible” losses to be ~$3.2 Bn (~50bps of CET 1) in excess of reserves. In addition, claims related to the Residential Mortgage-Backed Securities Working Group (we are encouraged by press reports that both Goldman Sachs & Morgan Stanley (MS) are currently in settlement talks), market manipulation (FX, ISDAfix, CDS), HFT and commodities related litigation remain unresolved.
Notwithstanding the unresolved litigation risk, we continue to rate Goldman Sachs Outperform given similar valuations to peers (both Goldman Sachs & Morgan Stanley trade at 1.2x PTBV) but a higher return profile for Goldman Sachs over the near-to-intermediate term. Longer term, we view Goldman Sachs as a best-in-class brokerage franchise with solid market positioning across myriad client businesses and a strong balance sheet; we expect Goldman Sachs will continue to deliver fundamental results that are at the high end of peers.
Shares of Goldman Sachs have gained 1.6% to $178.30 at 2:29 p.m., while Morgan Stanley has advanced 2.9% to $34.43.
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