Will Goldman's (GS) Q4 Earnings Overcome Trading Slump?

Expected slump in trading business is likely to adversely affect The Goldman Sachs Group, Inc.’s (NYSE:GS) fourth-quarter earnings, to be reported on Jan 17. Nevertheless, benefits of higher rates and relatively better performance of the other segments — mainly investment banking — are anticipated to offset the trading slump.

Being an investment bank, Goldman is exposed to extreme market volatility. Therefore, the company is likely to be affected by the subdued volatility experienced during the quarter.

Several political and geopolitical developments, rising rate environment, passage of the tax act and absence of any significant progress on the regulatory reforms proposed by the Trump administration should have driven volatility. However, subdued inflation in the United States and marginal increase in long-term interest rates, along with absence of positive catalysts, have been on the downside.

Similar to the last couple of quarters, lower fixed-income trading is likely to be primarily responsible for lower trading revenues in the to-be-reported quarter. The Zacks Consensus Estimate for the Institutional Client Services division, of which the major portion comprises fixed income revenues, reflects a decline of 13.9% from the year-ago quarter.

Here are the other factors that might influence Goldman’s Q4 results:

Investment Banking Fees Might Escalate: Continued momentum in investment banking business is anticipated to support bottom-line figures. Strong advisory and underwriting fees on the back of higher debt origination and equity issuances are likely to provide a boost to the top line. As the interest-rate hike is expected to continue, many U.S. companies have been raising fresh debt capital over the recent quarters to avoid higher interest rates later. Therefore, debt origination fees will lead to solid gains.

Also, despite being a seasonally weak quarter for equity issuances globally, the fourth quarter turned triumphant. Strong rally in the equity markets across the globe might have boosted IPOs and follow-on offerings. So, the related fees are projected to increase for banks. Thus, Goldman is also likely to report an impressive quarter.

Notably, the Zacks Consensus Estimate for investment banking segment is projected at $1.6 billion, up 6.7% year over year.

Rise in Net Interest Income: In addition to higher interest rates, a moderate improvement in lending — particularly in the consumer area — might perk up interest income.

Strong Expense Management: Goldman completed an expense initiative during the first half of 2016 which translated into run-rate expense savings of around $1.6 billion in 2016. The bank is focused on enhancing its efficiency while maintaining strong franchise and investing in new opportunities. Thus, continuation of expense management will likely aid bottom-line expansion in the coming quarters.

Adverse impact of new tax code: The tax reform might result in elevated operating expenses from one-time bonus payments, higher charitable contributions and investment losses from securities portfolio restructurings. Additionally, Goldman’s fourth-quarter 2017 results are likely to reflect a $5-billion negative impact triggered by the latest tax reform, which levied taxes on overseas income. Also, deferred tax assets (DTAs) will lose value due to tax cut.

Here is what our quantitative model predicts:

Goldman does not have the right combination of two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — for increasing 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.

Zacks ESP: The Earnings ESP for Goldman is 0.00%.

Zacks Rank: Goldman carries a Zacks Rank #3, which increases the predictive power of ESP. But we also need to have a positive ESP to be confident of a positive earnings surprise.

The Zacks Consensus Estimate for earnings of $4.90 reflects a 3.54% decline on a year-over-year basis. Further, the Zacks Consensus Estimate for sales of $7.6 billion indicates 6.6% fall from the prior-year quarter.

Stocks That Warrant 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 Legg Mason, Inc. (NYSE:LM) is +0.18 and the stock flaunts a Zacks Rank of 1 (Strong Buy). The company is scheduled to release December quarter-end results on Feb 7. You can see the complete list of today’s Zacks #1 Rank stocks here.

BB&T Corporation (NYSE:BBT) is slated to release results on Jan 18. The company has an Earnings ESP of +0.33% and carries a Zacks Rank of 2 (Buy).

SunTrust Banks, Inc. (NYSE:STI) has an Earnings ESP of +0.81% and carries a Zacks Rank of 2. It is scheduled to report results on Jan 19.

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