Goldman Says No Thank You To Underwriting Bank Deals In Troubled EU Economies

Goldman Sachs (NYSE:GS) seems to be focusing on keeping its risk exposure in check, evident from the fact that the global investment bank actually opted out of fundraising rounds by several high-profile banks in peripheral Europe. ^[1] In a clearly discernible trend, Goldman Sachs turned down a role in all the three major equity market offerings by Southern Europe banks this year – the rights issue by Spain’s Banco Popular Espanol, and the share sales by Italy’s UniCredit and Portugal’s Banco Espirit Santo. Spoils of these offerings were shared by competitors Morgan Stanley (NYSE:MS), JPMorgan (NYSE:JPM), Citigroup (NYSE:C) and Bank of America (NYSE:BAC).

Notably, Goldman last assisted a bank based out of one of the troubled PIIGS nations last July when it helped in the rights issue of Italy’s third largest bank, the Banca Monte dei Paschi di Siena. We see this as a prudent stand by Goldman Sachs which is current leading the league tables for deal volume of global equity & equity-related deals over the first nine months of the year despite this decision. ^[2]

We maintain a $127 price estimate for Goldman’s stock, which is about 5% above the current market price.

See the full Trefis analysis for Goldman Sachs

If you are Goldman Sachs, you can afford to be picky about who you do business with. The bank seems to be leveraging the reputation it has created for itself over the years in the best possible way under this difficult economic environment – ensuring that it remains the market leader in the underwriting business while hand-picking the offerings it actually handles based on the underlying risk.

It must be mentioned here that the three bank offerings Goldman chose to forgo were by no means trivial – UniCredit’s €7.5 billion ($9.7 billion) stock sale was the largest by any company in the EMEA region this year. Banco Popular Espanol raised €2.5 billion ($3.2 billion) through its rights offering, whereas Banco Espirit Santo sold shares worth €1 billion ($1.3 billion). ^[1] But in each of these cases, Goldman decided against being part of the deal as it believed that the economic weakness in the region makes the risk associated with them too high.

No doubt memories of a dismal Q3 2011 which saw Goldman reporting only its second ever quarterly loss since it went public are a major factor in the bank’s risk aversion. And having burnt its fingers with considerable losses linked to the Banca Monte dei Paschi di Siena rights issue last year, Goldman is treading carefully.

So has this policy hurt Goldman’s position in the equity underwriting market?

Definitely not, going by Thomson Reuters’ report for the first nine months of the year. ^[2] The bank still remains the highest ranking bank when it comes to global equity and equity-related underwriting over the Jan-Sept period with a healthy 9% share of around $450 billion raised by companies from equity markets across the world. Interestingly, Goldman fares much better in the EMEA region than any of its competitors with the bank playing a role in 12.5% of $93 billion raised.

Looks like Goldman has learned how to say ‘No’ at the right time.

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1. Goldman Turns Down Southern Europe Banks as Crisis Lingers, Bloomberg, Nov 26 2012 [↩] [↩]
2. Global Equity Capital Markets, Thomson Reuters Deals Intelligence [↩] [↩]