Goldman climbing towards Fed's capital demands

2 min read
David Henry, Elizabeth Dilts

Goldman Sachs has already boosted capital measures and is working to meet the US Federal Reserve's benchmark for October, the Wall Street bank said.

Investors and analysts were eager to hear Goldman's announcement because the bank fared worse than rivals on the Fed's stress test last week, sending its share price tumbling 8% on Friday.

The Fed examined big banks' balance sheets to see if they had enough funds on hand to handle losses during two years of severe economic and market stress.

Goldman's loan portfolio suffered much higher hypothetical loss rates than peers. Its key measure of common equity capital as a portion of assets dropped to 12.5% in March compared with the Fed's requirement that it have 13.7% by the start of October.

The bank has already bolstered that CET1 ratio to "above 13%" so far this quarter, chief executive David Solomon said in the statement.

"We have a track record of rebuilding capital when necessary," he said.

Although Goldman's improved ratio is a good sign, it does not satisfy all the outstanding concerns, analysts said.

The bank has been trying for years to transform itself into a full-service commercial bank: unveiling a consumer brand called Marcus, launching a cash-management business and promising to generate more, and less-volatile, revenue from its investment banking and trading arms.

Those changes remain a work in progress with an unclear trajectory, analysts said.

Goldman is still so exposed to trading that its recent success in the business probably helped it build capital so quickly, Wolfe Research analyst Steven Chubak said. It also still has meaningful exposure to private equity and leveraged loans, which were treated more harshly in this year's stress test, he noted.

"Goldman didn't have the best mix for this year's test," Chubak said.

Goldman was already pulling back on private equity and leveraged loans. Speeding up that process would help meet the Fed's capital measure, but also hurt earnings.

Morgan Stanley analyst Betsy Graseck estimates that Goldman's balance sheet shrinkage could ding earnings per share by about 6% next year.