NEW YORK ( TheStreet) -- Goldman Sachs ( GS) will see a big hit to earnings and revenue next year as a result of a new rule being crafted by regulators, even if the most lenient terms are adopted, according to a JPMorgan ( JPM) analysis. Kian Abouhossein, an analyst with JPMorgan-Cazenove who covers investment banking, estimates that Goldman's revenue could plummet 46% in 2012 if the Volcker rule is implemented in a strict fashion, with earnings set to decline 15% this year, even if the regulation's scope is limited. The Volcker rule - officially known as Section 619 of the Dodd-Frank financial reform bill - is meant to lessen the risk to taxpayers and depositors by barring large banks from trading capital from their balance sheets for the express purpose of earning money. It will also restrict banks' investments in hedge funds and private equity firms and perhaps put a tighter watch on venture capital as well. Regulators at the Securities and Exchange Commission and Commodity Futures Trading Commission are working to define what, exactly, is included within the realm of "proprietary trading." Investment banks have not just traders who trade for the bank's bottom line, but others who take positions in securities and commodities to provide clients with liquidity. The latter function is known as market-making. Goldman is widely held as the big U.S. bank with the most exposure to the Volcker limits. The bank is working to replace trading revenue with other types of business, though it is likely to take some time. "Goldman is the best-in-class liquidity provider today, but potentially has the most to lose from the new regulation," said Abouhossein. Other firms will see earnings and revenue decline as well. While CFO David Viniar has said that pure prop trading accounted for a "10-ish type of percent" of Goldman's business in recent years, it represented less than 2% of revenue at both Citigroup ( C) and Bank of America ( BAC), and slightly more at JPMorgan Chase, all of which have big consumer banking businesses and Wells Fargo ( WFC) barely has a presence in that area.
In advance of official rules, which won't be fully effective until 2014, SEC officials have met with financial industry representatives and accepted comments on structuring new regulations. Banks have also been shifting traders in advance of the rules, moving some into wealth management divisions or elsewhere, while other employees have left to join or start their own trading shops. According to Abouhossein's analysis, Goldman will see $3.7 billion in revenue and $1.5 billion in net income vanish in 2012, from "pure" prop trading alone. That represents a 15% hit to earnings per share. Morgan Stanley ( MS) is close behind, with $1.7 billion in revenue and $728 million in profit - or 13% of earnings per share - sensitive to the new provisions. If market-making capabilities are also impacted by the Volcker rule, Abouhossein estimates that 46% of Goldman's revenue will be impacted, vs. 20% at Morgan Stanley, 15% at Citi and 12% at Bank of America. JPMorgan didn't outline its own sensitivity to the rules. Interestingly, the outcome of Volcker may benefit European and leave customers footing the bill. Abouhossein says that clients who use investment banks will probably want one-stop shopping for liquidity and trading capabilities, particularly because of other restrictions coming down the pike from Dodd-Frank. If European banks like Credit Suisse ( CS), Deutsche Bank ( DB) or Barclays ( BCS) can provide that and U.S. banks can't, it's clear where the business will go. Abouhossein says European banks have been "behind the curve" in taking advantage of that liquidity gap. But: "Net net," he says , "it will have a negative impact on liquidity and volumes, with the end users of all products ultimately bearing the increased cost." On Wednesday afternoon, Goldman shares were trading 1.4% higher at $171.79, despite another JPMorgan equity analyst report downgrading the stock to neutral on valuation concerns. JPMorgan was up 2.6% at $44.74, with Bank of America up 1.9% at $14.97, Citi up 2.1% at $5.04 and Morgan Stanley up 2.5% at $28.65. -- Written by Lauren Tara LaCapra in New York. >To contact the writer of this article, click here: Lauren Tara LaCapra. >To follow the writer on Twitter, go to http://twitter.com/laurenlacapra.