Below are our initial observations on Goldman Sachs as compared to its peers. I've had a burning sensation telling me that GS is grossly overvalued, but I haven't had a chance to prove it empirically. I am now diverting the resources necessary to prove or disprove this "feeling". I will keep the blog posted.

 

Bank Level 1 Assets Level 2 Assets Level 3 Assets Shareholder Equity Total Assets Level 1 Assets-to-Total Assets Level 3 Assets-to-Equity Leverage (X)
Citigroup $223 $934 $133 $114 $2,183 10.20% 117% 19.21
Merrill Lynch $122 $768 $41 $32 $1,020 12.00% 130% 31.94
Lehman Brothers $73 $177 $39 $26 $786 9.20% 152% 30.59
Goldman Sachs $135 $621 $96 $43 $1,189 11.40% 226% 27.89
Morgan Stanley $115 $226 $74 $31 $1,045 11.00% 236% 33.43
                 
Based on 1Q2008 reported data          

 

·        At the end of 1Q2008 Goldman Sachs had second highest proportion of level 3 assets to total shareholder’s equity. Goldman Sachs’s level 3 assets as proportion of adjusted shareholder’s equity has increased from 161% in 2Q2007 to 258% at the end of 1Q2008. Although Goldman Sachs has high proportion of level 3 assets it has not reported significant write-downs. On the contrary the bank has reported net gains on its mark-to-market valuation adjustment on its level 3 assets of $2.0 bn in 1Q2008 as losses on securities were more than offset by gain of $5.1 bn on derivatives contracts indicating effectiveness of timeliness of derivative position under current crunch financial market conditions.  In 4Q2007 and 3Q2007 GS reported mark-to-market valuation gain(loss) on its level 3 assets of $(360) mn and $ 620 mn, respectively.

 

·        Goldman Sachs leverage is comparable to its peer group with leverage ratio of 27.89x

 

·        Goldman Sachs adjusted P/B of 1.75x is relatively high compared to its peer group. However, the same can be attributed to relatively better quality of its assets and its ability to better withstand the current problem in the financial and capital markets.

 

·        However, on the other side, Goldman Sachs has highest VaR of $171 mn  ahead of Morgan Stanley’s VaR of $107 mn and Lehman Brothers VaR of $106 mn.

·        Its investment banking and asset management fee based revenues have slowed down significantly over the past few quarters due to slow down in the capital market activities.

 

Based on these initial observations, while the stock does seem to command higher pricing multiples compared to its peers, it is likely it may be over-valued at the current price. We will have to dig deeper to precisely check if the stock is materially overvalued. I will have my team further explore Goldman Sachs’ relative strengths and weakness with respective to its peers regarding exposure of assets, revenues and will I wll post my findings.