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Why Goldman Sachs Group, Inc. (GS) & Morgan Stanley (MS)’s Results Are Unimpressive

Published on May 7, 2013 at 3:54 pm by The Motley Fool in News
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Goldman Sachs Group, Inc. (NYSE:GS)’s Tier 1 common ratio fell to 12.7% and its Tier 1 capital ratio fell to 14.4% –reflecting the revised market risk regulatory capital requirements. On Dec. 31, 2012, its common ratio was 14.5%, while its capital ratio was 16.7% under Basel 1 — i.e. before implementation of revised market risk regulatory-capital requirements.

Similarly, Morgan Stanley’s capital ratio and common ratio declined to 13.9% and 11.5%, respectively, from a capital ratio of 16.9% and a common ratio of 13.3% a year ago.

For both of these banks, the ratio is well above 5%. But the Fed believes that if the banks continue with their current dividends and buyback plans, then under a 2014 stressed scenario these ratios could fall to 5.8%(Goldman Sachs) and 5.7% (Morgan Stanley), thus coming dangerously close to the red line.

Besides these two banks, Feds have also warned JPMorgan Chase & Co. (NYSE:JPM), whose common equity ratio could fall to 5.6%. The three firms are required to fix the problems, while JPMorgan Chase & Co. (NYSE:JPM) and Goldman Sachs are also asked to resubmit their plans to the Federal Reserve before the end of the third quarter.

Those plans will be tweaked and some minor changes are going to occur, but I am not expecting anything significant. Regulators and the banks seem to disagree mainly on estimates related to losses in an economic downturn. The banks have been more optimistic than the regulators; Goldman believes that under severe stress, it could post losses of $6.6 billion, but the Fed thinks that $20.5 billion is a better estimate.
The financial institutions also seem confident, as JPMorgan Chase & Co. (NYSE:JPM) has announced, after hearing from the regulators, that it will continue with its plan to increase its dividend by 26.7% to $0.38 per share in Q2 and would buyback shares worth $6 billion in 2014. Similarly, Morgan Stanley will go ahead with its plan of purchasing the remaining shares of Smith Barney from Citigroup Inc (NYSE:C).
Conclusion
In essence, by passing the stress test, even with the conditions attached, the banks have been given the green light. But the problems with current ratio and poor results from some of their biggest segments has highlighted that Morgan Stanley (NYSE:MS) and Goldman Sachs  have under-performed as compared to their peers.

The article Why Goldman and Morgan Stanley’s Results Are Unimpressive originally appeared on Fool.com and is written by Sarfaraz Khan.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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