They may seem more prestigious than plain-vanilla deposit-taking banks, but Morgan Stanley and Goldman Sachs face the same headwinds as their peers as earnings season kicks off Friday.
Both face one-time dings from the tax changes, as reported in December. And both have excellent prospects for 2018, if stronger economic growth around the world, stronger inflation, and choppier markets emerge as expected.
Read: Bank earnings will be ‘mixed,’ ‘messy’ and ‘muddied.’ But there’s some good news
So Goldman GS, +0.74% and Morgan MS, +1.70% which report January 17 and 18, respectively, will just have to hope that investors see the fourth quarter as one last hurdle before all the stars align for a brighter 2018. Here’s what analysts expect from the coming earnings announcements—and what they are waiting for clarity on.
As with the rest of the big banks, investment banking revenues will be mixed, as strong equity capital markets volumes offset weaker debt capital markets and advisory fees for mergers and acquisitions. “We expect investment banking fees to increase 5% to 10% on a year-over-year basis but fall modestly from the third quarter,” said Barclays analyst Jason Goldberg.
For trading, low volatility and a tough comparison to the frenzied pace of 2016’s fourth quarter, just after the presidential election upset, will make this a tough quarter. KBW analysts believe fixed income, currencies and commodities trading revenues for all banks will be down 24% compared with a year ago and 15% compared with the third quarter. Stock trading revenues, meanwhile, should be down 1% for the year and 7% for the quarter.
Goldberg expects Goldman to announce per-share earnings of $5.19, better than the consensus. But Barclays has an equal weight rating on the stock, lower than the consensus. Goldberg is waiting to hear whether the bank will still be able to increase its share buybacks, given the $5 billion tax hit it expects to take. KBW analysts believe that will need to be scaled back, and are recommending investors stay underweight Goldman.
Kian Abouhossein, a J.P. Morgan analyst, calls Goldman top in his “global investment bank pecking order” and notes that he’s expecting the firm to announce buybacks of $1.5 billion in the fourth quarter. Abouhossein has an overweight rating on Goldman shares.
Another open question analysts will be waiting to hear Goldman executives address is the bank’s hunt for an additional $5 billion in revenue.
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Barclays’ Goldberg thinks Morgan Stanley’s investment management and wealth management businesses will benefit this quarter from “higher market levels and interest rates.” Cost-cutting and share buybacks should also help. Barclay’s has an equal weight rating on the stock and expects Morgan Stanley to report per-share earnings of 80 cents.
Abouhossein expects Morgan Stanley—second in his “pecking order”—to make $1.25 billion of share buybacks for the fourth quarter.
The bank’s tax write-down won’t have as much of an impact as Goldman’s will, KBW analysts note. “We view shares of Morgan Stanley as attractive given the company’s discounted valuation versus peers, exposure to capital markets, and trading activity outside the U.S.,” they wrote, adding that owning Morgan Stanley shares may be the best way to position for reform of the onerous Federal Reserve stress-testing process, which they think could happen in 2018.
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Among analysts surveyed by FactSet, the consensus estimate is for earnings per share of $4.59, down from $5.08 a year ago, and revenue of $7.6 billion, versus $8.2 billion a year ago. The mean rating is overweight, and the target price is $266.69, about a 5% premium over recent trading levels.
Estimize, which crowdsources estimates, has an EPS consensus of $5.21 and $7.9 billion in revenue.
The FactSet analyst consensus for Morgan Stanley is for per-share earnings of 64 cents, down from 81 cents a year ago, but revenue of $9.2 billion, higher than the $9 billion booked a year ago. The mean stock rating is overweight, and the price target of $58.08 is about 7% higher than its price in trading on Thursday.
Estimize’s EPS estimate is for 81 cents, and its revenue estimate is for $9.2 billion.
Goldman shares have gained about 4% in the last 12 months, while Morgan Stanley has gained 24%.
The Financial Select SPDR ETF XLF, +0.90% has gained 23% and the S&P 500 SPX, +0.67% has gained 21%.
The Dow Jones Industrial Average DJIA, +0.89% is up 28% in the period.