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Trading to Support Goldman (GS) Q3 Earnings Amid Low Rates

Increase in client activities and rise in market volatility on coronavirus concerns are likely to have aided trading revenues (both equity and fixed-income), which in turn are likely to drive Goldman SachsGS third-quarter 2020 results, slated for an Oct 14 release.

Coronavirus-induced global economic slowdown raised investors’ concerns, while the Federal Reserve’s efforts and support from the government’s stimulus package acted as tailwinds. Thus, equity markets performed well during the quarter and fixed-income markets delivered a robust performance.

The Zacks Consensus Estimate of $2.1 billion for net revenues in Fixed Income, Currency and Commodities Client Execution suggests 50% fall from the prior-quarter reported number, as significant market volatility was witnessed during the second quarter. The consensus estimate for equities revenues indicates a decline of 32% sequentially to $2 billion.

Goldman’s asset management business put up a decent performance in the quarter. Inflows from the asset-management business are likely to have been recorded on market gains, though lower than the second quarter. Also, improvement in the prices of asset values is likely to have aided asset-management fees. The Zacks Consensus Estimate for asset-management revenues is pinned at $1.7 billion, indicating a 19% sequential decline.

Other Factors at Play

Decent Investment Banking Fees: Global M&A activity was impressive during the July-September quarter as dealmakers across the globe were active during this period with rise in M&A deal value and volume. Therefore, this might have had a positive impact on Goldman’s advisory fees.

Moreover, IPO activities were strong, and as companies tried to build liquidity to tide over the pandemic-induced crisis, there was a substantial rise in follow-up equity issuances.

Also, equity market performance was strong and overall debt issuances were on an upswing, given lower interest rates. Thus, equity underwriting and debt origination fees (accounting for almost 55% of total investment banking fees) are expected to have gone up in the quarter under consideration.

The consensus estimate for investment banking fees of $1.75 billion indicates 34.2% sequential fall.

Soft Growth in Consumer Banking Revenues: Continuation of economic slowdown due to the pandemic is likely to have strained consumer banking revenues. Although consumer spending improved from the first half of the year, card fees might have recorded soft growth. Yet, advisory services on wealth management might have provided some respite. Overall, the consensus estimate for revenues of $1.39 billion indicates a 2.2% rise from the previous quarter’s reported number.

Low Net Interest Income: The overall lending scenario remained soft during the July-September quarter, with commercial real estate loan portfolios having offered some support. Conversely, weakness in revolving home equity and consumer loans, along with commercial and industrial activities are expected to have offset growth. However, low deposit costs might have been an offsetting factor for margins.

With the central bank cutting interest rates to near zero this March to support the U.S. economy, Goldman’s net interest margin and NII are likely to have been adversely impacted.

Prudent Expense Management: Goldman is focused on enhancing efficiency, while maintaining a strong franchise and investing in new opportunities. As the majority of unnecessary expenses have already been slashed by the bank, expense reduction is unlikely to have provided much support. Although Goldman has resolved quite a few litigation issues, it still faces probes and queries for the bank’s businesses conducted during the pre-crisis period. As a result, the company’s legal expenses are expected to have flared up.

Other Development: During the quarter, Goldman finalized a settlement worth $3.9 billion by signing an agreement with Malaysia to resolve the multibillion-dollar 1Malaysia Development Berhad scandal. As a result, the bank lowered net income for second-quarter 2020 and increased its litigation reserve.

Here is what our quantitative model predicts:

Our proven model shows that Goldman has the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or better — to increase the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for Goldman is +8.36%.

Zacks Rank: It currently carries a Zacks Rank #3.

The Zacks Consensus Estimate for earnings of $5.37 indicates a 12.1% rise from the year-ago reported number. Further, the consensus estimate for sales of $9.19 billion suggests a 10.4% year-over-year rise.

Other Banks Worth a Look

Here are some other bank stocks that you may also want to consider, as our model shows that these too have the right combination of elements to post an earnings beat this time around:

The Earnings ESP for CullenFrost Bankers, Inc. CFR is +2.61% and the stock carries a Zacks Rank of 3, at present. The company is slated to report third-quarter numbers on Oct 29. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Huntington Bancshares Incorporated HBAN is set to release earnings figures on Oct 22. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +2.88%.

U.S. Bancorp USB is scheduled to release quarterly results on Oct 14. The company has an Earnings ESP of +7.70% and currently carries a Zacks Rank of 3.

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U.S. Bancorp (USB): Free Stock Analysis Report
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CullenFrost Bankers, Inc. (CFR): Free Stock Analysis Report
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