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The Goldman Sachs Group Inc. (NYSE: GS) earnings report will be released before the bell tomorrow (Wednesday), and could prove the most dramatic example of how U.S. banks are struggling to return to healthy profitability and revenue growth.
Analysts' consensus pin Goldman earnings at about $1.78 per share, 54.4% lower than the same quarter last year. Revenue is forecast to fall 35.9% year-over-year to $6.65 billion for the quarter.
But some analysts' earnings estimates go as low as 70 cents a share - an 82% drop from last year's fourth quarter and a far cry from the whopping $8.20 a share in 2009.
"It just doesn't look like there is enough business out there to allow Goldman to come anywhere close to where street consensus estimates are for the company," Richard Bove, an analyst at Rochdale Securities LLC, told Yahoo Finance.
In fact, with U.S. banks' earnings getting squeezed from a weak global economy and increased regulation, the fourth quarter could cap the worst year for Goldman since it went public in 1999.
Another Disappointing Quarter for Goldman Sachs Earnings
If current estimates are right, this would mark the fourth consecutive quarter of declining revenue for Goldman Sachs.
The third quarter of 2011 was especially painful, with Goldman's revenue down 47.9% from 2010's third quarter. Goldman reported a loss of $428 million, compared to a $1.74 billion profit from the year before.
Goldman joins its banking counterparts in a year of staggering revenue and profit loss. JPMorgan Chase & Co. (NYSE: JPM) last Friday reported fourth quarter earnings fell 23% from the same quarter last year, and revenue was down 17%. Citigroup Inc. (NYSE: C) followed Tuesday reporting an 11% drop in profits.
"It's likely 2011 will be the worst year for revenue growth for the banks since 1938, and so far 2012 isn't feeling much better," Michael Mayo, an analyst with Crédit Agricole Securities, told The New York Times. "The industry simply grew too fast over the past two decades and now it's downshifting. This process will take time, but the hit to revenue is happening now."
Trading and investment banking activities aren't the powerful money-makers they once were due to nervous investors pulling out of markets, and increased fees designed to protect customers. JPMorgan's investment banking revenue fell 30% in the fourth quarter - a bad sign for Goldman due to the firm's focus in that area of operations.
Besides the predicted revenue decline, what's alarming for Goldman is how far earnings estimates for the bank have slipped in the past few months. Goldman's fourth-quarter profit estimates three months ago were $3.14 a share - about double current expectations.
Bove in December slashed his earnings per share forecast for the firm by a drastic 66% to 79 cents a share - one of The Street's lowest expectations.
"Trading activity has slowed down dramatically, there's been a big drop in investment banking activity," Bove explained. "Mergers and acquisitions are down 10-15%, new equity offerings are down 15%, trading in things like governments and agencies have fallen off dramatically, trading in commodities is way down."
Weak U.S. Banking Sector Outlook
The lowered expectations for the U.S. banking sector stem from increased banking regulation, the struggling economic recovery, and turmoil from the European debt crisis.
The main question for the banking sector coming out of this quarter is how firms plan to cope with the new realities as they head into 2012.
"The big issue for the banks is, is this a cyclical or a secular problem? And the answer is, it's both," Bove told Bloomberg News.
Bove warned that banks like Goldman Sachs may never again see growth rates in excess of 10%.
"It's not going to happen because the leverage in the balance sheet is gone, the off-balance-sheet conduits are illegal, the variable-interest entities are limited, the structured-investment vehicles are gone," said Bove, describing activities now blamed for causing the 2008 financial crisis. "The leverage isn't there and the market isn't there."