Goldman Sachs Q4 Earnings Likely to Disappoint, the Question Is By How Much

As Wall Street waits for Goldman Sachs Group (NYSE:GS) -- the fifth-largest U.S. bank by assets and one of the most powerful banking institutions in the world -- to report fourth-quarter earnings Wednesday, the question most analysts seem to have is not whether the earnings release will be underwhelming, but just how bad the hit will be.

Consensus earnings estimates for Goldman's fourth-quarter earnings, which was once $4 on a per-share basis, now stand at $1.24. That dramatically lowered guidance came after a round of markedly pessimistic research notes late last year, and earlier this month, where analyst after analyst laid out a plethora of reasons why the bank would not be as profitable as previously thought. New international and federal capital regulations, a drought in the IPOs and debt issues that drive investment banking, and a drop-off in global trading volume, among other headwinds, were cited.

"We do believe the year ended on a difficult note with highly depressed levels of institutional and corporate client risk appetite and a year-end seasonal slowdown," Credit Suisse analyst Howard Chen wrote in a Jan. 5 note, where he set his fourth quarter earnings estimate at a lowly 70 cents per share.

Goldman's core sales and trading unit is widely expected to report a double-digit percentage drop, when compared to a year ago, as the company rushes to meet BASEL III capital requirement rules and braces for upcoming federal requirements that will curtail the kinds of trading it can do from the house account. An even larger dip is seen in investment banking, as the firm will suffer from a global slowdown in deal-making for the quarter; market data firm Dealogic estimates investment banking fees were $13.9 billion globally for the quarter, down 37 percent from the same period a year ago.

The bank will likely take a relatively smaller hit on decreasing revenues from market-making, a result of the decrease in trading volume across all securities categories. Again according to Dealogic, the dollar volume of global securities sales was down 26 percent to $1.24 trillion in the fourth quarter of 2011.

"A lackluster quarter"

Because those troubles are global in scope, they are not likely to affect Goldman more than the bank's peers. Other large-cap banks, in fact, have already paved the way for Goldman to disappoint.

On Friday, JPMorganChase & Co. (NYSE:JPM) missed analyst consensus expectations on fourth-quarter earnings by two cents, the result of lesser-than-expected investment banking and trading revenues, as well as weak performances in the bank's credit card and mortgage units. Tuesday, Citigroup reported an even wider miss -- it reported quarterly earnings of 38 cents versus consensus expectations of 50 cents -- as the bank reported both decreasing revenues and increasing costs.

"It was a lackluster quarter," Brad Hintz, an analyst who covers large-cap banks for Sanford C. Bernstein, was quoted in the Wall Street Journal, referring to the wider banking sector.

"Frustration is bubbling"

While analysts were continually downgrading their views on the the bank (5 out of the 25 equity analysts who had made predictions on the bank's fourth-quarter performance issued lowered guidance on Jan. 6), other headlines have also made observers worry about the state of the house of Goldman.

On Dec. 21, Fox Business News' Charlie Gasparino reported that the investment firm was looking to change the structure of its business model to emphasize asset management, cutting back on the importance it bestows upon the more-profitable fixed-income trading segment.

A few weeks later, on Jan.9, Bloomberg cited anonymous sources saying Goldman Sachs was among the firms considering pay freezes on junior bankers, a risky move for a firm in an environment where employees can easily defect to a rival.

Then, on Jan. 12, the firm announced that two of the four executives who lead the firm's securities division would be retiring, a development the Wall Street Journal said showed "how much frustration is bubbling through Goldman as the firm cuts pay and jobs to cope with lousy market conditions and new rules."

An Industry Bellwether

Whatever Goldman reports Wednesday, the results will likely affect the share price of its competitors as much as its own.

While downgrading expectations for the bank, some analysts noted earlier in the month that Goldman is slightly better positioned than some of its rivals. Competitors JPMorgan Chase, Morgan Stanley (NYSE:MS) and Bank of America (NYSE:BAC) are expected to write down hundreds of millions in accounting-related charges resulting from changes in corporate bond valuations, which Goldman Sachs will not have to do. Goldman is also expected to get a boost from an increase in the value of its investment holdings during the quarter.

"We continue to view GS as a best-in-class brokerage franchise with solid market positioning across myriad client businesses and a strong balance sheet," Chen, the same analyst who holds Wall Street's lowest estimates on earnings for the firm, wrote in the note.

Shares of Goldman Sachs Group closed Tuesday at $97.68, down $1.28‎, or 1.29 percent, from the previous day's close.