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Goldman Sachs' results may be bad, but they are a flesh wound

When Goldman Sachs announces its results next Wednesday, they could be painful. Following a bad quarter for banking, a tough quarter for trading and charges relating to its aborted attempt to push into consumer banking, the firm's return on equity could fall to 5%, well below its cost of capital.

This is after three rounds of job cuts, including the jettisoning of 125 managing directors (recently) and 4,000 people at the start of the year.   

Does Goldman need to start a fourth round of trimming?

Dick Bove, the veteran banking analyst who has followed Goldman since well before the financial crisis, suggests not. Yes, the second quarter will be bad, says Bove, but things are already looking up for the firm.

Bove's optimism is attributed to his recent observation that the situation is improving for US banks both when it comes to M&A revenues quarter-on-quarter and in terms of US issuance of investment grade debt and equity. "It appears that after many months of stress the core businesses turned around in June," he observes. 

This applies to most large US banks, but Bove says Goldman is particularly well placed to benefit from the bounceback. "At its core, most would agree that there is no better company in the world than Goldman Sachs in trading and equity-oriented investment banking," he declares. "By eliminating the areas of high cost and low profit, the bank has whittled itself down to a business model that has been successful for more than 150 years. This business model still works and does not have to be recreated."

As a result, Bove thinks Goldman's stock could actually bounce back once it's kitchen-sinked all its costs for the second quarter. Not only has GS shed its business problems (the retail business) but it's benefitting from a revival in its core businesses, he adds. 

If he's right, then the next round of cuts - tabled for the third quarter - may not be necessary after all. 

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AUTHORSarah Butcher Global Editor

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