Anticipating Dynamic Revival In Investment Banking And Wealth Management Expansion

Key Takeaways

• Resurgence in investment banking, particularly M&A, and equity underwriting is expected to drive revenue growth as markets and client demand recover.
  
• Strength in Global Banking and Wealth Management, leveraging regulatory strategies, is poised to boost earnings stability and competitive shareholder returns.
  
• Narrowing consumer operations and regulatory concerns may constrain growth, while slow recovery in key banking activities and geopolitical risks could affect earnings.

Catalysts

A financial institution, provides a range of financial services for corporations, financial institutions, governments, and individuals worldwide.

• Goldman Sachs is expecting a resurgence in investment banking activity, particularly in M&A and equity underwriting, which should drive future revenue growth as markets reopen and client demand increases.
  
• The firm is leveraging its leading position in Asset & Wealth Management to capitalize on secular growth opportunities, aiming for continued high single-digit revenue growth from its durable management fees and expanded lending offerings, which could enhance net margins.
  
• Continued strength in Global Banking and Markets, particularly in FICC and equities financing, is expected to bolster earnings stability through enhanced revenue durability and client engagement.
  
• Incremental investments in the ultra-high net worth segment and expansion of loan product offerings are anticipated to drive growth in the Wealth Management business, contributing to improving pretax margins and long-term earnings potential.
  
• Strategic navigation of regulatory changes, such as those involving the Basel III revisions, is expected to protect the firm's growth trajectory without significantly increasing capital requirements, allowing flexibility in capital deployment and supporting competitive advantages in delivering shareholder returns.

Goldman Sachs Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Goldman Sachs Group's revenue will grow by 1.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 23.1% today to 25.7% in 3 years time.
• Analysts expect earnings to reach $13.2 billion (and earnings per share of $38.16) by about October 2027, up from $11.4 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $15.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.5x on those 2027 earnings, up from 15.1x today. This future PE is lower than the current PE for the US Capital Markets industry at 22.0x.
• Analysts expect the number of shares outstanding to grow by 1.37% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.82%, as per the Simply Wall St company report.

Goldman Sachs Group Future Earnings Per Share Growth

Risks

• The narrowing of Goldman Sachs' consumer footprint, which includes the transition of the GM card platform and the sale of the seller financing loans portfolio, has reduced ROE by 80 basis points and caused a $0.62 decrease in EPS, impacting earnings negatively.
  
• Concerns regarding the regulatory process, including Basel III revisions and the interconnectedness of capital requirements across the trading book and other buffers, may result in higher capital requirements that could constrain growth and increase the cost of credit, impacting net margins and competitiveness.
  
• While there has been progress, Global Banking and Markets' activity levels are still below longer-term averages, particularly in equity underwriting and M&A volumes. This slow recovery could limit revenue growth from these key areas.
  
• Investment in private banking and lending is undercut by the capital-intensive reduction of historical principal investment (HPI) portfolios, which still causes a drag on revenues and net margins, and may take time to unwind fully.
  
• Ongoing geopolitical instability, fluctuations in rates, and policy implications from global elections could introduce uncertainties and risks that impact revenue and client engagement, potentially affecting earnings performance.

Valuation

• The analysts have a consensus price target of $532.74 for Goldman Sachs Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $600.0, and the most bearish reporting a price target of just $450.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $51.2 billion, earnings will come to $13.2 billion, and it would be trading on a PE ratio of 17.5x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $522.38, the analyst's price target of $532.74 is 1.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.