Goldman Sachs Group Inc (GS.N) management believes the bank can produce a return-on-tangible-equity of 20 percent under better operating conditions, Sandler O'Neill analyst Jeffery Harte said in a report on Friday after meeting with three senior bank executives.
The figure is far above the single-digit return-on-tangible-equity figures the investment bank has been producing lately, and it signals that Goldman executives have become more optimistic about future results.
Goldman executives first outlined a 20 percent return-on-tangible-equity target after the financial crisis, which the bank hoped to achieve over the long term across good and bad market conditions. Executives have since backed down from the goal without offering a new one, citing uncertainty about how financial reforms might affect profits.
The measure is closely watched by investment bank shareholders because it indicates how much profit Goldman can generate with shareholder money.
A Goldman spokesman declined to comment on Harte's report, citing a bank policy of not commenting on analyst notes, but pointed to executives' earlier statements.
"We just haven't even worked it out in our own mind where it settles out," Goldman Chief Executive Lloyd Blankfein said at a conference last year. "So we haven't reported it officially, and we haven't sorted it out even unofficially amongst ourselves."
At an event in May, Goldman's president, Gary Cohn, reiterated that the bank "is not in a position to offer a new ROE target today."
But after meeting with the bank's chief financial officer, David Viniar, and two of Goldman's co-heads of securities, Harvey Schwartz and Isabelle Ealet, Sandler's Harte said that "management sees nothing today that would keep Goldman Sachs from posting a (return-on-tangible-equity) of 20 percent or better in a more robust macro-operating environment."
Before the onset of the subprime financial crisis in 2007, Goldman had produced annual return-on-tangible-equity figures above 30 percent. Last year, the bank's return-on-tangible-equity was just 3.7 percent, hindered by weak trading volumes, sluggish deal activity, a loss in one quarter, and the repurchase of an expensive investment by Warren Buffett.
Harte, who rates Goldman a "buy" and raised his share price target by 4 percent to $125, said he expects the company to continue returning capital to shareholders through stock buybacks and dividends until market conditions improve.
"We walked out of the meetings feeling more confident about Goldman Sachs' relative position to capitalize on opportunities in the currently challenged revenue environment," Harte said in the report.
Goldman shares were up 2.4 percent at $116.31 on Friday afternoon. Through Thursday, the stock is up 26 percent so far this year.
(Reporting by Lauren Tara LaCapra; Editing by Leslie Adler)