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Can Strong IB Revenues Buoy Goldman's (GS) Q3 Earnings?

Goldman's (GS) Q3 results are likely to reflect spectacular IB revenue growth, while strong equity volumes are likely to have been partially offset by the normalization of fixed-income trading.

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This story originally appeared on Zacks

The Goldman Sachs Group, Inc. GS is slated to release third-quarter 2021 earnings on Oct 15, before market open. The company is set for year-over-year growth in revenues and earnings.

- Zacks

In the previous quarter, Goldman’s earnings per share of $15.02 significantly surpassed the Zacks Consensus Estimate of $9.90. Strength in equity underwriting business, wealth management and consumer banking business acted as tailwinds. Impressive financial advisory revenues, owing to the rise in industry-wide completed mergers and acquisition transactions, were positives. Moreover, provision benefits supported the results.

Over the trailing four quarters, the company’s earnings have surpassed the consensus estimate on all four occasions, the surprise being 72%, on average.

High volatility in the equity markets in September due to the Fed meeting is expected to have spiked trading volumes in equities, providing decent support to trading revenues. This is likely to have been offset by low fixed-income trading activities.

Amid this backdrop, the Zacks Consensus Estimate of $1.9 billion for net revenues in Fixed Income, Currency and Commodities Client Execution suggests a 22.5% fall from the previous year quarter’s reported number. The consensus estimate of $2.2 billion for global market revenues from equities indicates a year-over-year rise of 8.9%.

Other Factors at Play

Impressive Investment Banking (IB) Fees: Similar to the past several quarters, deal-making continued at a fast pace in third-quarter 2021. This was primarily driven by robust macroeconomic expectations, companies deploying their cash reserves, appetite for improving scale and market share, and increasing confidence in the economic recovery. Low interest rates have offered cheap debt-financing opportunities, further fueling the shopping spree in the United States.

Amid this, Goldman’s solid position in announced and completed mergers and acquisitions globally is likely to have enabled it to witness impressive IB fee growth. The consensus estimate for IB fees of $3.1 billion indicates a 58.4% year-over-year rise.

Net Interest Income (NII) Growth: Overall growth in loans was moderate in the third quarter. Per the Fed’s latest data, real estate, consumer loan, auto loan and card loan portfolio growth has supported the lending business. In the third quarter, the yield curve spread widened, with the 10-year Treasury yield rising significantly at the quarter end, thereby, likely propelling NII. Additionally, the deposit balance is likely to have been stable or grown modestly, supported by government stimulus. This too is expected to have aided NII.

The consensus estimate for Goldman’s NII of $1.6 billion suggests a 45% increase from the prior-year quarter’s reported number.

Higher Inflows in Asset Management Business: Goldman’s asset management business is expected to have put up a decent performance in the reported quarter. Higher market gains are likely to have driven inflows from the asset management business.

Key Developments During the Quarter

In August, Goldman entered into an agreement to acquire Dutch asset manager, NN Investment Partners, from NN Group N.V. in a €1.6-billion (or $1.9 billion) all-cash transaction. The buyout will bolster its Europe distribution and fund management capabilities as well as increase firmwide assets under supervision to more than $2.6 trillion.

In mid-September, Goldman entered into a definitive agreement to acquire GreenSky, Inc., a pre-eminent fintech platform that offers home improvement consumer loan originations. The move will augment its retail lending footprint,offering an opportunity to leverage on the lender’s growing user base and to tap the $430-billion home improvement market.

Here is what our quantitative model predicts:

Our proven model shows that Goldman does not have 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 0.00%.

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

Prior to the third-quarter earnings release, Goldman’s activities during the July-September period were adequate to gain adequate analyst confidence. Notably, the Zacks Consensus Estimate for third-quarter earnings has been revised 3.3% upward to $9.70 over the past week. It suggests a marginal year-over-year increase.

Also, the consensus estimate of $11.3 billion for quarterly revenues indicates 4.3% growth from the prior-year quarter’s reported number.

Banks Worth a Look

Here are some stocks you may want to consider, as according to our model these have the right combination of elements to post an earnings beat this quarter.

The Earnings ESP for JPMorgan Chase & Co. JPM is +0.60% and the stock carries a Zacks Rank #3 at present. The company is slated to report third-quarter 2021 results on Oct 13. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

BankUnited, Inc. BKU is scheduled to release third-quarter results on Oct 21. The company currently carries a Zacks Rank #3 and has an Earnings ESP of +1.90%.

U.S. Bancorp USB is scheduled to release earnings on Oct 14. The company, which carries a Zacks Rank #3 at present, has an Earnings ESP of +0.38%.



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