Navigating Challenges And Embracing Opportunities For Growth In Global Banking And Markets

Key Takeaways

• Expansion in Global Banking & Markets and Asset & Wealth Management, alongside a strong Investment Banking backlog, signals expected revenue growth from diversified services.
  
• Technological advancements and an active share repurchase program with dividend increase reflect confidence in financial health and future profitability.
  
• Geopolitical instability, inflation, regulatory discrepancies, and intense competition may threaten profitability, earnings, and strategic growth across divisions.

Catalysts

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

• Expanding Global Banking & Markets and Asset & Wealth Management sectors demonstrated robust year-on-year growth, which is expected to drive revenue growth through continued market share expansion and deepening client relationships.
  
• Significant increase in Investment Banking backlog indicates a potential rise in future revenues from advisory and underwriting services as M&A activity and capital markets transactions are anticipated to recover.
  
• Strong fundraising in alternatives with expectations to exceed $50 billion suggests heightened management and other fees, enhancing earnings from Asset & Wealth Management.
  
• Advancements in artificial intelligence and technology are likely to lead to new demand for infrastructure and financing needs across various sectors, promoting revenue growth opportunities for Goldman Sachs.
  
• Active share repurchase program and a 9% increase in quarterly dividends signal confidence in the firm's growth prospects and financial health, potentially leading to an improvement in EPS.

Assumptions

• Analysts are assuming Goldman Sachs Group's revenue will grow by 2.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 21.5% today to 25.5% in 3 years time.
• Analysts expect earnings to reach $13.4 billion (and earnings per share of $39.94) by about July 2027, up from $10.5 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $15.1 billion in earnings, and the most bearish expecting $12.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.6x on those 2027 earnings, down from 16.2x today. This future PE is lower than the current PE for the US Capital Markets industry at 21.3x.
• Analysts expect the number of shares outstanding to decline by 2.85% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.42%, as per the Simply Wall St company report.

Risks

• Geopolitical instability and stickier-than-anticipated inflation could introduce significant uncertainty and volatility, potentially impacting trading and investment banking revenues.
  
• A discrepancy in stress test results compared to the firm's internal assessments and engagement with regulators may signal underlying risks not fully recognized, possibly affecting capital allocation strategies and impacting earnings.
  
• Challenges in significantly improving the AWM (Asset & Wealth Management) segment's ROE, despite growing assets under supervision, could limit overall profitability and earnings growth.
  
• Intense competition in both Global Banking & Markets and Asset & Wealth Management, especially as other firms invest heavily in these areas, may pressure margins and impact net revenues.
  
• Reductions in consumer charge-off provisions in the wholesale book might not be sustainable, potentially leading to higher future credit losses and adversely affecting net earnings.

Valuation

• The analysts have a consensus price target of $492.67 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 $571.0, and the most bearish reporting a price target of just $373.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $52.5 billion, earnings will come to $13.4 billion, and it would be trading on a PE ratio of 14.6x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of $502.18, the analyst's price target of $492.67 is 1.9% lower. 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.