Stress test results could jeopardise Goldman’s profit source

Concerns have emerged that Goldman Sachs, the leader on Wall Street for long, might see an important engine of profitability go, The New York Times reported.

On the Federal Reserve stress tests last week, Goldman's performance vis-à-vis other big banks came out poorly, leaving analysts and investors worried that the bank could be barred by regulators from buying back its own stock or increasing dividends.

Goldman had used dividends and share buybacks to appeal to investors at a time when other elements of the bank's business had faced challenges. When companies bought shares of their own stock on the open market, they generally increased the amount of profits attributed to every share, which was an important metric for investors.

Several analysts had released research questioning whether the Federal Reserve would allow Goldman to continue its buyback programmes given the results of the stress tests.

According to the estimates of Brian Kleinhanzl, an analyst with Keefe, Bruyette & Woods, if Goldman was not able to repurchase shares, it could earn 42 cents a share less than expected this year, and $1.78 a share less than expected next year.

The Federal Reserve released projections of each bank's ability to withstand a severe recession and other shocks over the next two years. The projection showed that a bank capitalised at less than 5 per cent would be in danger of failing.

The Federal Reserve subjected 31 of the biggest US banks to the stress test, in which all passed even the most stressful scenario involving almost $500 billion of combined losses.

According to the Fed, even in that scenario they would have enough capital to keep going. The tougher examination, however, was yet to come.

The Fed would announce on Wednesday whether it had accepted or rejected the banks' plans for returning capital to shareholders over the next couple of years, on the basis of those worst-case assumptions.

According to commentators the results of stage one did not mean that some might not fail the second. This was a qualitative test – as much a judgment on a bank's grasp of the risks it was facing, as the size of its capital buffer.