The Banking and Strategy Initiative

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The magic bottom trick for banks? – Fed Stress tests and the mire in Europe

Goldman Sachs is at a 60% lower $88 having hit a low of $87.60 in trading and a couple of writings affirming buy targets on the stock are already up. Macquarie analysts have added coverage for Goldman Sachs and the Buy targets at UBS and others after rework on October 17 still a hefty $140

The investment banking divisions would be effecting the most job cuts, more than 10000 in the top bracket firms on Wall Street but their best foot forward may not be able to stop any downward spells in Europe, as the abyss is here to stay comes with its own two weeks of clarity in the global markets. Trading volumes and trading strategies are thin but first and foremost, the impact of stress test results will be the biggeest positive for the banks and that is not coming before March,. US top 6 trading banks will find it easy to cross the rubicon as enough risk management has been effected to achieve a 6-7% Tier I common target.

As Goldman Sachs analysts mention,

“Reduced leverage, higher quality assets (lower risk,limited/no prop trading) and higher capital levels relative to prior exams should help banks withstand the stress of the Fed’s exam,” a team of analysts led by Richard Ramsden wrote in a report.(The street)

Investment Banking revenues will be on the cliff in 2011 and all of 2012, Barclays Capital estimating the drop to 2/3 of 4th quarter 2010

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in end 2012. Goldman Sachs ran a sim on 21 of the 31 banks taking Fed’s exam as a provision of the Dodd Frank Act of 2010 and the 21 showed an ability to absorb $900 bln in losses The first edition of the exam had 19 candidates in 2009 and almost no fails. Dodd Frank requires a 50 bln denominator for Fed to consider a s a basis for giving the test.

Goldman Sachs and JP Morgan will easily use their International spread to establish and grow their franchise at the expense of the disappearing Europeans and the struggling other like Nomura and Credit Suisse. Wells Fargo doing better because of its absence from Europe, will however lose when the International business starts trumpeting dealmaking profits, BofA still trying to get out of the Fed’s clutches.

It is difficult to compare between Morgan Stanleys, Citi and others with a universal model but one might not trumpet them with the same confidence . In the meantime Goldman Sachs alumni make their mark on a new edition of Europe ( only its transition to an integrated non disaster for global stability from the looks of it)

Banks like Deutsche Bank and HSBC may also need to figure out a way to deal with completed ringfencing and the 50% hit on their net margins , a condition already resolved in the 2009-11 churn in the USA but most othr competition from the continent/UK is going to be weak and dispirited for some years to come


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