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Trading, Underwriting Business to Aid Goldman (GS) Q2 Earnings

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Increase in client activities and rise in market volatility on the coronavirus concerns are likely to have aided trading revenues (both equity and fixed-income), driving Goldman Sachs’ (GS - Free Report) second-quarter 2020 earnings, slated for a Jul 15 release. The global economic slowdown, the Federal Reserve’s accommodative stance and a number of activities in the quarter continued to impact economy and kept tickling trading counters, resulting in volatile market performance.

Investors also continued to move toward safe havens like Treasury bonds and other commodities like gold on uncertain markets amid the coronavirus crisis. Hence, Goldman’s solid market revenues are expected to have aided its performance in the to-be-reported quarter.

The Zacks Consensus Estimate of $2.3 billion for net revenues in Fixed Income, Currency and Commodities Client Execution suggests a 23.3% fall from the prior-quarter reported number as the first-quarter witnessed the highest quarterly performance in five years. The consensus estimate for equities revenues indicates a decline of 4.5% sequentially to $2.1 billion.

Goldman’s asset management business might have put up a decent performance in the quarter. Inflows from the asset-management business are likely to have been recorded on market gains. 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 $1.4 billion compared with the negative revenues recorded in the previous quarter.

Other Factors at Play

Soft Investment Banking Fees: Global M&A activity continued to be hampered and reached the lowest level in more than a decade during the June-end quarter amid the coronavirus concerns. Additionally, deal making chucked on economic slowdown and lessened business activities. Therefore, this might have had an adverse impact on Goldman’s advisory fees.

Though IPO activities picked up a bit in the last weeks of June, the same was low through the quarter. Nonetheless, as companies tried to build liquidity to tide over the pandemic-induced crisis, there was a substantial rise in follow-up equity issuances.

Also, amid near-zero interest rates and the Fed’s bond purchase program that commenced on Mar 23, bond issuance volumes were strong as companies took this as an opportunity to bolster their balance sheets. Thus, growth in Goldman’s equity underwriting and debt origination fees (accounting for almost 55% of total investment banking fees) with its commendable position in the market is likely to have offered some respite.

The consensus estimate for investment banking fees of $2 billion indicates a 9.1% sequential fall.

Soft Growth in Consumer Banking Revenues: The continuation of economic slowdown due to the pandemic is likely to have strained consumer banking revenues. Card fees might have been hurt on lower consumer spending due to the shutdowns. Further, the company has waived certain fees, including that on monthly services, and penalties on early withdrawal, which is expected to have dampened revenues. Yet, advisory services on wealth management might have provided some respite. The consensus estimate for revenues of $1.4 billion calls for a 6.7% decline from the prior-quarter reported number.

Low Net Interest Income: The overall lending scenario remained decent during the April-June quarter, with commercial and industrial, along with real estate loan portfolios having offered significant support. Conversely, as consumer sentiment dipped amid coronavirus concerns, the demand for consumer loans was hit hard. However, low deposit costs might have been an offsetting factor for margins.

With the central bank cutting interest rates to near zero in 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 its 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. Additionally, there were no major outflows related to legal settlements during the April-June period that might have hurt Goldman’s earnings unusually.

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 +8.79%.

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

However, the Zacks Consensus Estimate for earnings of $3.91 indicates a 32.7% plunge from the year-ago reported number. Yet, the consensus estimate for sales of $10.1 billion suggests a 6.5% year-over-year rise.

Other Banks Worth a Look

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

U.S. Bancorp (USB - Free Report) is scheduled to release quarterly results on Jul 15. The company has an Earnings ESP of +16.59% and currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Earnings ESP for PNC Financial (PNC - Free Report) is +37.7% and it carries a Zacks Rank of 3, at present. The company is slated to report second-quarter numbers on Jul 15.

BNY Mellon (BK - Free Report) is set to release earnings figures on Jul 15. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +0.46%.

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