Earlier, in one of our reports, we saw how Goldman Sachs (GS) lost its gold. Goldman Sachs, one of the large cap banks in the U.S., was considered to have a competitive advantage of having the most talented workforce in the Financial Industry. However, we concluded that it had lost its competitive advantage. While the bank was busy shedding its most valuable human resources and slashing salaries, GS was accused of losing its moral fiber by its own top executives. We also noted that going forward, the bank will face a decline in profits due to the pressure from the weak U.S. economy and stringent regulatory requirements. Therefore, we reiterate our sell recommendation for Goldman Sachs. If an investor wants exposure to the U.S. financial sector and the recovering U.S. housing sector, we believe Wells Fargo (WFC) is the best play.
As the bank reported its lowest first half turnover since 2005, the situation on the human resource front has not improved, and we see news of a managing director of the debt trading and sales department leaving, after having served the bank for over 11 year. Lester R. Brafman, a 50-year old executive at the bank, was heading the department, which earned over 58% of the total revenues of the bank in the second quarter of the current year. According to a report on Bloomberg, the bank further decided to cut another 20-30 jobs in the same department.
The bank was involved in substantial litigations that had the potential of adversely affecting future performance. In the first half of August, the Department of Justice closed an investigation and announced it would not press charges against Goldman Sachs. The investigation had been started in April 2011 and pertained to the bank's behavior in the run-up to the financial crisis. The department also claimed that it did not have enough evidence to pursue criminal charges against the bank, or its employees, for concealing the bank bet against the $1.3 billion mortgage-backed securities it sold to investors related to real estate. The news released some pressure on the stock and the share price went up 1.1% to $103.6 on August 9, 2012.
Reiterating our bearish stance on Goldman Sachs, analysts from JPMorgan (JPM) and a number of other companies have downgraded the bank to underweight. The shares of Goldman Sachs are suffering the uncertainty regarding the Volcker rule. This uncertainty is also affecting other banks besides Goldman Sachs. We expect the profits for GS to decline further as a result of this rule.
The difference in the valuations of Goldman Sachs and Morgan Stanley (MS) is the key reason why analysts prefer the latter over the former. Goldman Sachs' stock is trading at a 25% discount to the book value, while Morgan Stanley's stock is trading at a discount of 50%. With regards to their P/E multiple, the stock is trading at a multiple of 16 times, while Morgan Stanley's stock trades at a multiple of 13 times. Compared to this, JPMorgan's stock trades at a P/E multiple of 9 times, and 0.76 times its P/B value.