Goldman Sachs Smashes Earnings Estimates. Are Bank Boom Times Back?

Key Takeaways

• Goldman Sachs has beat earnings forecast substantially with earnings per share hitting $8.25 against predictions of $7.51.
• They’re the latest bank to announce big earnings beats as rising interest rates improves margins across the financial sector.
• This may be signposting a move away from low interest rate, high growth economy which has favored big tech for the past decade.
• For investors, it may mean the need to revisit the investment strategy that has worked so well since the 2008 global financial crisis.

Earnings season is back, and so far the banks look set to be the winners. Goldman Sachs has today announced Q3 profit figures of $8.25 cents per share, beating Wall Street analysts predictions of $7.51 cents per share.

They’re following the lead from competitors JPMorgan Chase, Bank of America and Wells Fargo who have all raised their revenue outlook off the back of rising interest rates.

Even Mad Money’s Jim Cramer has come out and said that banking stocks could sweep by tech to become the new market leaders, though his track record has inspired an ‘Inverse Cramer ETF’ so it’s worth taking with a pinch of salt.

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Goldman Sachs Q3 figures

As well as beating on earnings, revenue for Goldman Sachs was higher than expectations at $11.98 billion. That’s $450 million more than the $11.53 billion that had been forecast, in a big beat for the global bank.

Net earnings for the quarter were at $3.07 billion which takes total earnings year to date up to $9.94 billion.

They’ve been putting a greater emphasis on growing their consumer business, in an expansion away from their core business which has traditionally been led by investment and institutional banking.

As a result, net revenue in the consumer and wealth management sector grew 18% compared to this time last year, compared to investment banking which is down -57% and asset management which has dropped -20%.

Consumer banking net revenue almost doubled Q3 2021 to $744 million, which has been largely attributed to higher credit card balances and higher net interest margins.

Banks are bank in the winners circle

Prior to the 2008 financial crisis, banks and financial institutions were the undisputed darlings of the market. Soaring profits and seemingly never ending revenue growth provided shareholders with incredible returns on an annual basis.

Until they didn’t.

The collapse of the global property market and the fallout across the financial system has been publicized and analyzed to death at this point. It’s spawned books, essays, research papers and Hollywood blockbusters (The Big Short is our favorite).

Major banks such as Lehman Brothers and Bear Stearns collapsed, others needed significant government bailouts and the central banks began a new era of money printing and historically low interest rates.

At the same time, we witnessed the rise of big tech. Facebook had only been open to the public for two years, YouTube had only been around for three and Instagram, Snapchat, TikTok and Pinterest didn’t even exist yet.

Since then these companies, along with the growth of more established names like Apple, Amazon, Google and Microsoft, have grown to become the biggest fish in the biggest market in the world.

Lately though, they’ve started to falter.

So far this year we’ve seen a huge drop in the valuations in these companies and continued pressure on certain aspects of their business models. Some are more impacted than others, with Facebook in particular struggling amid privacy scandals and changes to Apple’s data gathering regulations putting pressure on Meta’s advertising revenue.

Another of the FAANGs (Facebook, Amazon, Apple, Netflix & Google), Netflix, has fallen so out of favor that the acronym doesn’t really make sense anymore. These days, MAMAA (Meta, Amazon, Microsoft, Apple & Alphabet) seems more appropriate.

Banks on the other hand, have continued to remain steady despite dealing with the fallout of 2008. It’s been a relatively challenging time for banks when it comes to generating the level of profitability they’ve previously experienced.

Their core business became a lot more expensive post-financial crisis, with financial security requirements tightened up across the globe. That’s been a positive for the stability of the financial system, but there’s no denying that it’s increased their costs and capital requirements.

At the same time, record low interest rates have meant that margins for products like mortgages have been low too.

With interest rates on the rise, the tide may be turning.

Goldman beat follows wins by JPMorgan Chase, Bank of America and Wells Fargo

Goldman Sachs aren’t the only bank that’s been able to profit off the back of the current economic environment. So far this earnings season we’ve already seen wins from many other major banks.

Bank of America

BofA announced their Q3 results yesterday, resulting in profits of 81 cents per share. This was higher than analysts’ predictions which had forecast earnings of 78 cents per share. Overall revenue for the company was up 8% from this time last year to $23.5 billion.

A major driver for this growth has been strong consumer spending, with debit and credit card spending increasing 9% compared to 12 months ago.

Not only that, but consumers are borrowing more too. Loans grew a further $14 billion over the quarter, representing an increase of 5%.

That’s all well and good, but the key to the increased profitability in Q3 has been the net interest the bank received. You’ve surely noticed that when interest rates go up, banks are quick to move their mortgage and credit card rates but a bit slower to make the same move on their savings and deposit accounts.

This is what’s known as net interest, which is the difference between what a bank pays out to customers in bank interest and what they receive in loan interest.

This figure soared by 24% in Q3 to hit $13.8 billion. This represents a net interest margin of 2.06%, up from 1.68% last year. BofA also adjusted their revenue guidance for the rest of the year by around $600 million due to this change.

BofA stock soared 5% off the back of the announcement.

JPMorgan Chase

Another bank hitting it out of the park this earnings season has been JPMorgan Chase. Earnings per share hit $3.12 against analyst forecasts of $2.87 and revenue was $1 billion higher (!) than expected at $32.7 billion.

As with Bank of America, JP Morgan Chase has been a welcome beneficiary of higher interest rates. The net interest margin hit 2.09% which was a sizable jump higher than the expectation of 1.99%. This is higher still than the 1.62% margin that was achieved last year.

The revenue increase represents growth of 10.4%, which was achieved despite a slowdown in the company’s investment banking division. Overall that division lost almost $1 billion of assets under management.

JPMorgan Chase’s stock price has felt the pressure of the overall market volatility this year, but has risen over almost 14% since October 11th.

Wells Fargo

With a business model that relies more on mortgages than any of their main competitors, Wells Fargo has been an even bigger beneficiary of the widening net interest margin. They managed to increase their figure from an already high 2.03% last year, to 2.83% in Q3 2022.

This is a sizable premium over the 2.09% for JPMorgan Chase and the 2.06% from Bank of America.

Earnings per share for Wells Fargo hit $1.30 against analysts forecasts of $1.09, while revenue was also significantly higher at $19.51 billion compared to $18.78 billion. These figures have been achieved despite significant ongoing liability and litigation costs as a result of their 2016 scandal involving fake accounts.

Wells Fargo stock has held up significantly better than the S&P 500 as a whole this year and is down 8.38% so far in 2022. These positive results have seen a jump in the share price which has increased 9.27% since October 11th.

What does all this mean for investors?

A change in interest rate policy means a potential change in stocks and sectors that will perform well. Low interest rates favor high growth industries like tech, as borrowed money is cheap and plentiful.

As interest rates grow, more traditional sectors like banking can benefit, as we’ve seen so far in this quarter’s earnings calls.

In an environment like that, value stocks can be a potential area to consider. Value investing is basically looking for secure, stable businesses that have the potential to be undervalued. Warren Buffet is the most famous example of a value investor, and Bank of America currently holds the 2nd largest position in his Berkshire Hathaway portfolio.

The problem is we don’t all have the time, skills and resources of Warren Buffet. That’s where our AI comes in. Value Vault is one of our Foundation Kits, and it gives investors access to an AI-powered portfolio which seeks to identify US stocks with low relative valuations, high returns on capital and mature, predictable business models.

Our algorithm reviews thousands of data points and makes predictions on which securities are likely to provide the best risk adjusted returns, and then automatically rebalances the portfolio every week.

Not only that but we also offer Portfolio Protection on all of our Foundation Kits, which uses AI to automatically implement sophisticated hedging strategies to your portfolio. This predicts areas like overall market risk, interest rate risk and even oil risk and how they may impact your portfolio, and then implements hedging strategies to help guard against them.

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