UPDATE 4-Goldman shares climb on JPMorgan upgrade

* Upgrades from "neutral"

* Cuts 2011 EPS view by 5 pct to $12.80

* Keeps share price target at $175 (Changes paragrapghs one and two; updates stock price, adds valuation data; formerly NEW YORK/BANGALORE)

By Lauren Tara LaCapra

NEW YORK, May 31 (Reuters) - Goldman Sachs Group Inc's (GS.N) shares rose on Tuesday after an influential and previously skeptical analyst said the market had overreacted to a U.S. Senate panel report about the bank.

JPMorgan Securities analyst Kian Abouhossein lifted his rating on Goldman's stock to "overweight" from "neutral" in a note to clients, and maintained his price target of $175. Abouhossein said the market was "overreacting to the negative news flow" lately, as well as the potential impact of regulatory changes on the bank.

In afternoon trading, Goldman shares were up 1.1 percent at $140.23. Earlier in the day, the stock had traded as high as $142.30.

Goldman is moving toward a client-driven business model thanks to regulatory reform, a move that Abouhossein called "a paradigm shift." It is a stark difference from Goldman's prior model, which relied heavily on investing its own funds.

That strategy would be unworkable under the so-called Volcker rule, which will prohibit U.S. banks from trading for their own accounts.

As a result of that new regulation, JPMorgan estimates Goldman will have to divest $28 billion worth of assets from its investing and lending division. That would allow Goldman to buy back shares and boost returns, Abouhossein said.

"We believe the market is again overreacting to the negative newsflow," the analyst said in his report. "In our view, the price weakness is a buying opportunity."

Abouhossein had earlier issued one of the most pessimistic forecasts of how financial reform would hit Goldman's businesses. He estimated that the Volcker rule would reduce the company's annual profit by $3.7 billion, or 15 percent, and potentially affect $17.3 billion in revenue.

In January, he downgraded Goldman to "neutral," based on valuation and a generally negative view on U.S. investment banks, relative to European competitors.

But if the bank used proceeds from asset sales to buy back shares, Abouhossein believes Goldman shares could trade around 6.7 times earnings and 1.1 times net asset value in 2012. He predicts its return on net asset value would climb to 15.8 percent from 12.9 percent today.

Analysts estimate Goldman's net asset value at $75.7 billion, on average, according to a Thomson Reuters poll, compared with a market value of $71.8 billion as of Friday's close. Goldman said its book value per common share was $129.40 as of March.

LEVIN REPORT

A recent Senate subcommittee report on the financial crisis said that Goldman offloaded much of its subprime mortgage exposure to unsuspecting clients in late 2006 and 2007 as the market was starting to fall. [ID:nN20278875] When clients tried to get out of these positions, Goldman in some cases dragged its heels, magnifying clients' losses.

Goldman's market capitalization has shrunk by $12 billion, or 15 percent, since a congressional panel led by Senator Carl Levin released its report on the financial crisis, the brokerage said in a note.

But on Tuesday, Abouhossein struck a much more positive tone after having met with Michael Sherwood, co-CEO of Goldman Sachs International.

The analyst said he is not concerned about a management change, since Goldman has a deep bench of talent that can take over from Chief Executive Lloyd Blankfein. He also said that concerns about Goldman's reduced return-on-equity levels are already priced into the stock.

"In a nutshell, global Tier I investment banks such as Goldman are 'machines' with a unique partnership model that does not rely on individuals," Abouhossein said.

However, the brokerage trimmed its 2011 earnings target for Goldman to $12.80 a share from $13.50, mainly due to a slower-than-expected second quarter in fixed income, currency and commodities markets (FICC), and weakness in equities.

JPMorgan's main concern about the outlook for Goldman's stock price is that consensus estimates are too high. Analysts polled by Thomson Reuters expect the company to earn $14.65 per share in 2011, on average.

Of 25 analysts who track Goldman shares, 18 advise clients to buy the stock, six recommend holding it and Rochdale Securities analyst Richard Bove is the sole analyst with a "sell" recommendation. "Sell" recommendations are unusual on Wall Street.

Goldman shares have shed about 17.5 percent since the beginning of the year. JPMorgan kept its price target on the stock at $175, suggesting a 26 percent surge to year-end from Friday's close of $138.66 on the New York Stock Exchange. (Additional reporting by Mary Meyase and Tanya Agrawal in Bangalore; Editing by Gerald E. McCormick and Matthew Lewis)