Bank Reports Show US Consumer Remains Strong

After solid reports from JPMorgan (NYSE:JPM), Wells Fargo (NYSE:WFC), and Citigroup (NYSE:C), traders turned their focus to Goldman Sachs and Bank of America as they continued to search for clues about the strength of the U.S. consumer and economy.

Both Goldman Sachs and Bank of America reported earnings and revenue that exceeded expectations for Q3, further solidifying the strong showing of the major U.S. banks in the September quarter.

How Goldman Performed in Q3

For Goldman Sachs (NYSE:GS), traders were focused on trading revenue stemming from activity in Treasury securities and various assets, which has yielded positive results for several other banks. Traders were also looking to hear more from the bank’s CEO David Solomon, who has faced scrutiny after revealing losses within the consumer banking unit.

The banking titan reported a lower third-quarter profit compared to the previous year but managed to exceed lower earnings expectations, thanks to record revenue in its trading segments.

For the three months ending on September 30, Goldman Sachs profit dropped by approximately 36% to $1.88 billion, or $5.47 per share, compared to $2.96 billion, or $8.25 per share, in the same quarter the previous year.

Analysts had expected Goldman Sachs to report earnings of $5.42 per share. Third-quarter revenue amounted to $11.82 billion, a decrease from $11.98 billion in the prior year’s quarter but still above the average analyst estimate of $11.15 billion.

“We continue to make significant progress executing on our strategic priorities and we’re confident that the work we’re doing now provides us a much stronger platform for 2024,” said Solomon, Chairman and CEO of Goldman Sachs.

The global banking and markets segment generated a 6% increase in net revenues, reaching $8 billion. This growth was driven by strong performance in fixed income, currency, commodities, and equities. Moreover, the bank posted record quarterly revenue in its financing operations.

Equities net revenue saw an 8% rise to $2.96 billion, primarily attributed to higher equities financing revenue, especially in prime financing. This was partially offset by lower portfolio financing revenue. Revenue also increased in equities intermediation.

However, investment banking fees remained unchanged at $1.55 billion. Debt underwriting, driven by leveraged finance activity, buoyed this segment, but a decline in mergers and acquisitions activity weighed on the advisory business.

“I also expect a continued recovery in both capital markets and strategic activity if conditions remain conducive. As the leader in M&A advisory and equity underwriting, a resurgence in activity will undoubtedly be a tailwind for Goldman Sachs,” Solomon added.

Solomon has come under scrutiny following the disclosure of losses in the consumer banking unit. Analysts have been adjusting their expectations for Goldman Sachs, as the deal environment for mergers and acquisitions and initial public offerings has been lackluster despite expectations for a strong recovery after a disappointing year of 2022.

Goldman’s shares were mostly flat in Tuesday trading following the release of the Q3 earnings report.

How Bank of America Performed in Q3

Unlike Goldman, traders were looking to hear from Bank of America about the bank’s deposit activities, with particular attention on account holders shifting their funds into higher-yield products such as certificates of deposits.

Bank of America also topped third-quarter profit estimates, primarily driven by stronger-than-expected interest income. Earnings per share came in at 90 cents, above the expected 82 cents. Revenue rose 2.9% year-over-year to $25.32 billion, just ahead of the consensus of $25.14 billion.

“We added clients and accounts across all lines of business. We did this in a healthy but slowing economy that saw US consumer spending still ahead of last year but continuing to slow. Our growth in revenue and earnings allowed us to continue our investments in our people and technology to drive an enhanced client experience,” Chair and CEO Brian Moynihan said.

The bank attributed its performance to a 4% increase in interest income, which reached $14.4 billion, approximately $300 million more than what analysts had predicted. This segment’s growth was fueled by higher interest rates and increased loan activity.

Furthermore, the bank’s provision for credit losses was better than expected, standing at $1.2 billion, compared to the estimated $1.3 billion.

Despite its high exposure to consumers, Bank of America stock struggled to perform well in 2023 due to the bank’s poor strategic moves in the COVID-19 era. More specifically, BofA invested in low-yielding, long-dated securities, which were negatively impacted by the rising interest rates.

The management added that it maintained a disciplined approach in Q3, reducing expenses for the second consecutive quarter. Simultaneously, Bank of America said it has continued to invest in strengthening of its business.

A special focus has been placed on organic earnings generation, which has led to an increase in the capital ratio, now standing at 11.9%. This comfortably exceeds the required minimum of 9.5% as of October 1st.

Bank of America said it returned $2.9 billion in Q3 through common stock dividends and share repurchases.

BAC stock was modestly up in Tuesday’s trading session.

Conclusion

Bank of America stock rose after the bank reported trading revenue that exceeded the average analyst estimate. Additionally, the bank’s net interest income was also ahead of consensus expectations. Similarly, Goldman Sachs reported weaker YoY profit figures, although still ahead of market expectations.

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