Expectations are mounting for Goldman Sachs and Morgan Stanley to rebound strongly from their first-quarter meltdown after two of their biggest rivals displayed signs of strength in trading and investment banking.
Adjusted net income at Goldman and Morgan Stanley was predicted to recover from the first three months of the year but to fall steeply on the same period in 2015 after analysts slashed estimates in the weeks ahead of the results.
Bank of America continued the sector’s second-quarter results season on Monday. It was forecast to deliver net income of $ 3.7bn, according to consensus estimates collated by Bloomberg, up from $ 2.1bn in the first quarter but down 25 per cent from a year ago.
Yet analysts said some of the factors that helped JPMorgan and Citigroup may be more important for Bank of America’s other two rivals — particularly Goldman, which reports on Tuesday.
“Expectations have been raised a lot for Goldman” on the back of the figures from its peers, said Charles Peabody, analyst at Portales Partners.
He pointed to fixed-income markets revenue, which leapt 35 per cent year on year at JPMorgan and 14 per cent at Citi. Both banks pointed to strength in rates and currencies.
Fixed income, currency and commodities trading revenues accounted for 22 per cent of Goldman’s revenues last year.
Investment banking — advising companies on acquisitions, debt raisings and other deals — is also important to Goldman, ranked number one globally by fees last year, according to Deutsche, and to number four Morgan Stanley.
Both JPMorgan and Citi posted declines in fees from investment banking from a year ago, but rises from the first quarter.
Michael Corbat, Citi’s chief executive, on Friday gave a relatively upbeat outlook for dealmaking despite the uncertainty caused by the UK’s vote to leave the EU.
“Actually, on the heels of Brexit, we saw actually quite good deal flow,” he told analysts. “You saw debt capital markets, equity capital markets, M&A getting executed, getting announced.”
Tony Scherrer, portfolio manager at Smead Capital Management — which holds shares in JPMorgan and Bank of America — argued that big US investment banks were well placed to capitalise on difficulties of weaker competitors, including those in Europe.
“There’s weakness over there,” he said. “You [as a corporate client] want to partner with someone who has a lot of strength.”
He added: “The scale and breadth that you would seek out on the investment banking front is becoming more important.”
Marty Mosby, analyst at Vining Sparks, added: “There wasn’t a complete freeze as we went through Brexit. The deals are still being announced, for companies wanting to take advantage of low interest rates.”
Shannon Stemm, analyst at Edward Jones, said the results from JPMorgan and Citi had a “a positive read through” for the industry as “the rebound in trading activity in the second quarter was better than expected”.
Goldman Sachs was forecast to produce adjusted net income in the second quarter of $ 1.37bn, a rebound from the difficult first quarter but still down a third from the same period a year ago.
Morgan Stanley was estimated to generate $ 1.17bn, up a tenth from the first three months but a decline of about 25 per cent from the 2015 quarter.
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