Greater volatility in markets and improved deal flow expected to boost third-quarter earnings
Goldman Sachs CEO Lloyd Blankfein
Goldman Sachs & Co. is scheduled to report third-quarter earnings before the bell on Tuesday, and the investment bank is expected to report higher profit and revenue as the trading environment improved and deal flow picked up.
Like rivals, Goldman GS, +0.32% is expected to have benefited from greater volatility in markets, including in currency trading after the U.K. vote to leave the European Union, known as Brexit. Fixed-income trading is expected to have been boosted by changing bets on interest-rate moves, while equity markets continued to hit new highs.
Banks that have already reported have confirmed the trend. Last week, J.P. Morgan Chase & Co. JPM, -0.52% posted a 33% climb in trading revenue for the quarter. Profitability has been hurt in recent years by a shrinking trading business, hurt by low interest rates and tougher capital requirements.
Analysts can expect an update on a cost-cutting campaign that began in the first half, as well as on new ventures, including the launch last week of an online lending platform aimed at customers dealing with credit-card debt. That move is part of Goldman’s build-out of its consumer business, after it purchased about $16 billion of U.S. deposits from General Electric Co. GE, +0.03% earlier this year, as GE sold off all of its financial assets to focus on its core industrial businesses.
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Here’s what to expect from Goldman:
Earnings: The bank is expected to report per-share earnings of $3.80, according to analysts polled by FactSet, up from $2.90 in the year-earlier period.
Estimize, which crowdsources estimates from buy-side and sell-side analysts, hedge funds, academics and others, is expecting earnings of $3.91 per share.
Goldman has beaten earnings estimates in three of the last five quarters.
Revenue: Analysts polled by FactSet are expecting revenue of $7.358 billion, up from $6.861 billion a year ago. Estimize’s analysts are more bullish on revenue, with a consensus estimate of $7.589 billion. Goldman has beaten sales estimates in three of the last five quarters.
Share price: Goldman’s stock has fallen after earnings for six of the last eight quarters, according to FactSet. The stock has shed 5.7% of its value in 2016, while the Dow Jones Industrial Average DJIA, -0.29% has gained 4% and the S&P 500SPX, -0.30% is up 4.2%. The Financial Select Sector SPDR exchange-traded fundXLF, -0.46% has gained 0.2% on the year.
Analysts polled by FactSet have an average stock-price target of $183.38, equal to 8.5% upside from current levels. The average rating is overweight.
Other issues: Analysts welcomed the latest Federal Reserve stress results for Goldman, which found the bank well-positioned to endure even a severe economic downturn. The bank won regulatory approval to pay dividends or buy back its own stock.
“Organic growth, expense management, strong capital position and steady capital deployment activities continue to support Goldman’s growth prospects,” Zacks Research analysts wrote in a report. “Also, business diversification remains a key strength for earning stability.”
Investment-banking fees are expected to come to $1.536 billion, according to FactSet, which would be down from $1.787 billion in the second quarter. Fees from debt underwriting are expected to have benefited from record issuance, offsetting the dearth of underwritten equity offerings in the quarter. Fees from mergers-and-acquisitions advisory services are expected to come in at about $708 million, according to FactSet, after totaling $794 million in the second quarter.
Last week, Goldman won a legal battle with Libya’s sovereign wealth fund, when a U.K. High Court judge ruled in favor of the bank in a suit in which the Libyan Investment Authority alleged that bank executives exerted “undue influence” over its officials in derivatives trades. The fund had sued Goldman for $1.2 billion to cover losses on trades it claimed its employees did not understand.
Analysts will expect an update on the bank’s continued foray into the retail banking world that saw it launch its new online lending platform, called Marcus, last week. Marcus, named after Goldman’s founder, is initially offering personal installment loans of up to $30,000 to creditworthy borrowers.
It comes after the bank started to offer online savings accounts to ordinary Americans with as little as $1 to deposit last year, in a move aimed at diversifying its funding base and satisfying regulators.
Fitch Ratings said Monday it expects Marcus to become a “ formidable competitor to existing players.”
“Marcus is a new deposit-funded marketplace lender created in consultation with potential clients and with the benefit of the technological support and the financial resources of a global financial institution,” the agency said in a note.
By Ciara LinnaneSource: http://www.marketwatch.com/story/goldman-sachs-earnings-expect-a-big-improvement-in-trading-revenue-2016-10-17
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