Profitability suffers due to low interest rates and global weakness
In this part of the series, we’ll take a look at Goldman Sachs’s (GS) profitability ratios and compare them to Wall Street estimates.
A key element gripping the US banking sector (XLF) (KBW) is the prevalent near-zero interest rate environment that is acting as a drag on bank earnings.
In a meeting held in September, Janet Yellen, chair of the board of governors of the Federal Reserve, decided to delay an interest rate hike, citing global concerns as the reason. US banks earn lower returns on their assets as well as lower interest-based income when interest rates are low.
Global weakness is also likely to impact trading desks and slow down mergers and acquisitions activity, which could impact future earnings of investment banks like Goldman Sachs.
In order to boost profitability in a low interest rate environment, banks are reducing expenses by restructuring their businesses and focusing on their cores.
Profitability ratios for Goldman Sachs
Banks’ valuations are derived by the returns they are able to generate on their assets and shareholder equity. These are key measures of profitability for banks.
Wall Street analysts expect Goldman Sachs (GS) to post return on equity (or ROE) of 11.5%. During the last quarter, Goldman Sachs reported ROE of 4.8%, which was down from 14.7% in the first quarter due to high litigation expenses. ROE was 6.7% lower in the second quarter due to a $1.45 billion litigation charge reported by the company. In 3Q14, ROE for Goldman Sachs was 11.8%.
Goldman Sachs is the last of the five largest banks to report its earnings during this week. Earnings of competitors such as JPMorgan Chase (JPM), Bank of America (BAC), Wells Fargo (WFC), and Citigroup (C) were reported earlier in the week.