Goldman Sachs Group Inc., the fifth-biggest U.S. banking company by assets, will continue making principal investments with the firm's own money because executives do not think the so-called Volcker Rule prevents the practice, a Bank of America Corp. analyst said.
The analyst, Guy Moszkowski, published a note to investors Monday after meeting last week with four Goldman Sachs executives in Hong Kong.
The New York company does not think U.S. legislation passed last year that bans proprietary trading and limits holdings in hedge funds and private-equity funds precludes buying stakes in companies and other assets, Moszkowski wrote.
"The market interpretation of Volcker Rules is that this will be off limits ahead, but GS believes that many such investments will remain permissible, and will be closing on a 'meaningful' one in China shortly," Moszkowski's note said.
On March 11, the China Insurance Regulatory Commission approved AXA Life Ltd.'s sale of a stake in Taikang Life Insurance Co. to buyers including Goldman Sachs, according to a statement on the Chinese regulator's website. Goldman will get a 12.02% stake in Taikang Life Insurance, the statement said. The value of the stake has not been disclosed.
Moszkowski said that Goldman Sachs' return on equity, a measure of how well it reinvests capital, will exceed what investors expect if the firm is still allowed to invest on its own behalf.
Yusuf Alireza, head of Goldman Sachs' securities division in Asia, told Moszkowski that principal investments have historically been "one of the key drivers of Asia earning."
"If the firm can indeed continue to take on these principal investments, we believe that ROE can well exceed what's currently priced into the shares," Moszkowski wrote.
He wrote that the shares, which closed at $159.96 on March 18, "discount a long-term ROE of not more than 11%."
Michael DuVally, a spokesman for Goldman Sachs, did not comment.
Goldman Sachs in January changed the way it reports financial results, creating a division called Investing and Lending. This unit contributed 19% of Goldman Sachs' 2010 revenue, making it the second-largest division on that basis after institutional client services, or sales and trading, according to Goldman Sachs' annual report filed with the Securities and Exchange Commission.
The company's executives in Asia also said Goldman Sachs needs to improve its ability to offer local products to local clients in key markets, the note said.
Goldman Sachs has applied for banking licenses in India and China and, while the firm's executives think the India license could be granted in three to six months, Goldman Sachs has waited for years for its China banking license, the note said.
Moszkowski speculated that Goldman Sachs could try to speed the process by acquiring a small, weak Chinese lender.
Goldman Sachs "would be providing a service to the Chinese banking authorities by taking a problem off their hands, in exchange for which it would be able to take over an existing bank license," Moszkowski wrote.
