Goldman and Citi Downgraded: Why?

Bank of America has downgraded the stocks of Goldman and Citigroup from 'buy' to 'neutral' because of increased regulation and global turmoil. The harsh reality is that while largely ineffectual US and UK attempts at financial reform did curtail some of the riskiest elements of big banks' pre-crisis activities. What is surprising - and worrisome - is the degree to which these banks may have been dependent on such risky tactics for their financial growth. That European hedge funds are now reported to be moving operations to Malta to escape regulation underscores the degree to which that sort of behavior remains central to their views of future success.

Interpretation of the report by Gus Lubin at Business Insider:

"Lots of people are talking about this morning's report from BoA/Merrill Lynch that downgrades Goldman and Citi to neutral from buy.

BoA's Guy Moszkowski points to new regulations and geopolitical worries as factors that could affect revenue:

Downgrading Citi and GS to Neutral. POs cut. Common denominator: expected weakness in Q1:11 results. Results unlikely to be dismal, and should show improvement over Q4, but we don’t expect seasonal improvement as strong as often seen in the past. Client engagement remains subdued, Mid-East turmoil likely only to further reduce customer risk appetite. Thus we are making significant cuts to our forecasts, and expect consensus to decline over the coming weeks. Increasingly, we believe investors will look to the theme of improving cash flow/ return of capital via dividends/ buybacks, and also to play financials that are less– or even positively – affected by restrictions on banks such as Volcker Rules. In our coverage, this includes names such as BX and KKR, as well as LAZ. This, together with low valuation relative to current earnings, drives keeping JPM “Buy”.

Citi has a big focus on EM growth, and consequently it stands to lose when there's political turmoil.

Goldman in particular faces a possible revenue hit from the Volcker rule, which may send investors running to other banks. Goldman also posted relatively unimpressive trading revenues last quarter.