Goldman Sachs' Bottom Line Growth Is Key Earnings Driver

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While Wong of Morningstar doesn't expect a blockbuster repurchase or dividend announcement in Goldman's upcoming fourth quarter earnings, especially given a transition underway at the firm's chief financial officer position, the analyst adds that deploying excel capital for capital returns will also help the bank deliver on financial metrics like return on invested capital and return on equity, which have fallen short in recent years.

Capital returns are an important component to Goldman's earnings given investor optimism on the company's shares and uncertainty on whether key earnings drivers such as a debt underwriting boom and trading profits will remain in place in 2013.

Wong of Morningstar expects that as a debt-underwriting boom and trading gains on the bank's fixed income inventory play out, improving equity underwriting and merger and acquisition revenue could provide a revenue offset. However, an investment banking boom isn't a likely first half 2013 scenario, given the economic impact of 'fiscal cliff' and 'debt ceiling uncertainty.'

"We could be in for a relatively flat 2013 revenue year and it could be 2014 where the investment banks start to fire on full cylinders," says Wong, who notes Goldman Sachs shares are fairly valued at prices as of Jan. 14.

Other analysts are optimistic about Goldman's near-term performance.

Morgan Stanley analyst Betsy Graseck is above consensus on Goldaman's earnings because of a "less bad trading environment" and the prospect that the bank will be able to mark gains private equity investments it holds.

Still in Goldman's various trading businesses, Graseck expects trading revenue to fall roughly 11% quarter over quarter, with fixed income currency and commodity trading proving the biggest decline. Graseck expects a total share buyback authorization of $1.2 billion or 9.2 million shares and expects compensation expense to end the year at just over 40% of overall revenue.

Bernstein Research analyst Brad Hintz sees reason to be optimistic expense cuts will play out in the fourth quarter. Hintz projects total headcount will fall roughly 9% or 3,1000 employees, with the firm's partners falling 13% from levels at this time in 2010. A plan to put back office employees into less costly locations could help Goldman impress on the bottom line. "The benefits of the plan have largely been hidden so far," writes Hintz.

Overall, Goldman is expected to earn $3.66 in earnings per share on revenue of $7.8 billion, according to consensus analyst estimates compiled by Bloomberg. For the full-year, Goldman is expected to show $12.20 in earnings per share on revenue of $32.8 billion, however return on equity is expected to come in just above 9%, the data show

-- Written by Antoine Gara in New York