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Trading, Underwriting Business to Aid Goldman (GS) Q4 Earnings

Zacks Equity Research
·6-min read

Similar to the last reported quarter, increase in client activities and rise in market volatility are likely to have aided trading revenues (both equity and fixed-income), which,  in turn, are anticipated to have supported Goldman Sachs’ GS fourth-quarter 2020 results, slated for a Jan 19 release.

Prevailing concerns related to the pandemic, along with other major developments, including the U.S. Presidential elections and the optimism surrounding the coronavirus vaccine, led to a continued significant rise in market volatility in fourth-quarter 2020. Along with substantial volatility, client activity was strong. Thus, Goldman’s trading businesses are expected to have received significant boost in the to-be-reported quarter.

The Zacks Consensus Estimate of $2 billion for net revenues in Fixed Income, Currency and Commodities Client Execution suggests a 20% fall from the prior-quarter reported number, as significant market volatility was witnessed during the third quarter. The consensus estimate for equities revenues indicates a decline of 14.3% sequentially to $1.8 billion.

Goldman’s asset-management business put up a decent performance during 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 anticipated to have aided asset-management fees. The Zacks Consensus Estimate for asset-management revenues is pinned at $2.1 billion, indicating a 25% sequential decline.

Other Factors at Play

Decent Investment Banking Fees: Global M&A activity was impressive during the October-December 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 impressive, and as companies tried to build liquidity to tide over the pandemic-induced crisis, there was a considerable rise in follow-up equity issuances.

Furthermore, 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 during the quarter under consideration.

The consensus estimate for investment banking fees of $1.94 billion calls for a 1.5% sequential fall.

Soft Growth in Consumer Banking Revenues: Continuation of economic slowdown due to the pandemic might have strained consumer banking revenues. Although consumer spending improved from the first half of the year, card fees are likely to have recorded soft growth, mainly due to reduced consumer activity on a high unemployment level and uncertainty surrounding the new stimulus package. Nonetheless, advisory services on wealth management are anticipated to have provided some respite. Overall, the consensus estimate for revenues of $1.48 billion suggests a marginal fall from the previous quarter’s reported number.

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

With the interest rates near-zero level, 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 solid 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. Though 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.

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 +1.88%.

Zacks Rank: It currently flaunts a Zacks Rank #1 (Strong Buy), which further increases the predictive power of ESP.

The Zacks Consensus Estimate for earnings of $6.99 calls for a 49% rise from the year-ago reported number. Yet, the consensus estimate for sales of $9.65 billion suggests a 3% year-over-year decline.


The Goldman Sachs Group, Inc. Price and EPS Surprise

The Goldman Sachs Group, Inc. Price and EPS Surprise
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Other Banks Worth a Look

Here are a few other 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:

The Earnings ESP for CullenFrost Bankers, Inc. CFR is +4.5% and the stock sports a Zacks Rank of 1, at present. The company is slated to report fourth-quarter 2020 numbers on Jan 28. You can see the complete list of today’s Zacks #1 Rank stocks here.

Huntington Bancshares Incorporated HBAN is set to release earnings figures on Jan 22. The company, which flaunts a Zacks Rank of 1 at present, has an Earnings ESP of +3.39%.

U.S. Bancorp USB is scheduled to announce quarterly results on Jan 20. The company has an Earnings ESP of +0.44% and currently carries a Zacks Rank of 3.

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Our research shows that 5 cutting-edge stocks could skyrocket from the exponential increase in demand for “stay at home” technologies. This could be one of the biggest buying opportunities of this decade, especially for those who get in early.

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