Goldman Sachs Group (GS) has one the highest revenue exposure from investment banking, making the financial institution particularly sensitive to the current early stages of an economic, albeit slow, rebound during this period of low interest rates, says Brad Hintz, Equity Research Analyst at Sanford C. Bernstein & Co., LLC.
“Equity underwriting volumes are increasing, and financial sponsor advisory activity appears to be increasing. Among our coverage group, Goldman Sachs has the highest percentage of revenue coming from investment banking, and therefore its earnings are most sensitive to a rebound of banking. We have an ‘outperform’ rating on Goldman,” Hintz said.
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Hintz says an economic rebound would increase capita flows into equities in several steps, from allowing banks to profit more, moving capital from bonds to equities, and also by encouraging retail investors to return to stocks.
“In trading, a rebounding economy tends to boost equity indices and volumes and increasing new money flows into equity products. And a recovering economy eventually leads to rising interest rates, which supports the greater hedging activity and allows the low-cost deposit bases of the banks more profitable. But as rates rise and yield curves flatten, fixed income trading revenues slow, trading activity moves to the short end of the curve and principal transactions revenue weakens. And finally, as employment in the broader economy grows, the retail brokerage or wealth management sector rebounds as retail investors return to the equity market,” Hintz said.
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