Goldman, Morgan Square Off In Dueling Earnings Reports

On Tuesday, Goldman reports earnings for the first time under David Solomon, who took the reins from Lloyd on October 1. I guess that means everyone will be parsing these numbers for evidence to support the “strategy shift” narrative, where that means away from trading and towards “less volatile” businesses.

In Q1, Goldman turned in the best FICC numbers in three years and Q2 wasn’t too shabby either, which kind of underscores why it might be precarious to diversify away from trading too quickly. FICC revenue in Q2 rose 45% YoY with gains seen in all businesses.

Equities disappointed last quarter, though, as revenues there were $1.89 billion, flat on a YoY basis. Goldman cited lower volatility and “less favorable market-making conditions compared with the first quarter of 2018.”

IB revenue, on the other hand, easily beat estimates, thanks in part to a 7% YoY jump in Financial Advisory fees. That was good news, considering that in Q1, advisory revenues dove 22% YoY.

In Q3, Goldman beat on the top line, posting revenue of $8.65 billion. EPS was $6.28.

The bank looks to have missed pretty badly on the FICC front, with sales and trading revenue printing $1.31 billion, well below consensus of $1.45 billion. In line with peers (and as ever, that assumes it makes sense to use the word “peers” in the same sentence as the proper noun “Goldman”), equities trading was decent, coming in at $1.79 billion, comfortably ahead of estimates.

The 10% YoY drop in FICC revenue is attributed to “significantly lower net revenues in interest rate products and lower net revenues in credit products and mortgages”. On the bright side, Goldman says commodities held up well, which is good news considering all the negative press that unit has received over the past year. Goldman cited “low client activity amid low levels of volatility”, when explaining the drop in FICC.

The summer lull also led to lower client activity in equities, but thanks to what the bank says are “higher net revenues in client execution, reflecting significantly higher net revenues in derivatives”, equities trading managed to post an 8% YoY jump in revenues.

IB looks ok. Revenue there in Q3 was $1.98 billion – that’s a decent beat. It looks like equities underwriting was strong, while fixed income, not so much. The bank says IG activity has declined. Goldman also notes that the IB backlog is “lower compared with the end of the second quarter of 2018, but was higher compared with the end of 2017.”

Here’s what Solomon had to say:

We delivered solid results in the third quarter driven by contributions from across our diversified client franchise. Year-to-date earnings per share is the highest in our history and year-to-date return on equity is the highest in nine years, notwithstanding our continued investment in growth opportunities. We remain well positioned to continue delivering for our clients and shareholders.

Pretty generic, David – pretty generic (especially for a D.J.).

Meanwhile, Morgan Stanley is coming off yet another impressive quarter in Q2, when the bank beat on virtually everything, including IB revenue (the highest in at least a decade in the second quarter), equities sales and trading and FICC. They rounded things out with an improvement in wealth management pre-tax margins.

Well on Tuesday, Morgan said IB revenues in Q3 blew past estimates again, coming in at $1.57 billion versus consensus of $1.29 billion. The Q3 figure was down from $1.79 billion in Q2, though. The breakdown there shows lower advisory revenues (attributed to less M&A activity), but $441 million in equity underwriting revenues and more than a half billion in FI underwriting. Those latter two figures perhaps underscore slower commercial loan growth at BofA, as everyone eschews bank loans for tapping capital markets.

Overall, revenue during the quarter for Morgan was $9.87 billion, which very nearly beat even the highest estimates (range was $9.27 billion to $9.91 billion). EPS was $1.17, ahead of consensus, which was expecting $1.01.

Equity sales and trading (where Morgan dominates) brought in $2.0 billion during the period. That’s up slightly YoY, but down from $2.5 billion in Q2. FICC revenues were $1.2 billion, flat YoY, and down from the first and second quarters. Both the equities and FICC revenue figures beat estimates, but just barely.

Pre-tax margin in wealth management was 27.1%. That is yet another improvement (last quarter was 26.8%, and Q1 was 26.5%).

“Despite the seasonal summer slowdown in the third quarter, we reported solid revenue and earnings growth demonstrating the stability of the franchise”, Gorman said Tuesday, adding a perfunctory line about the bank remaining “well positioned and optimistic for the remainder of the year.”

Today’s numbers from Goldman and Morgan round out a mixed picture when it comes to Wall Street’s trading performance in Q3. JPMorgan missed on the FICC front, but equities revenue was strong, while results from Bank of America and Citi also showed strength in equity trading.

Morgan results

Goldman results