US Banks Q3 Earnings Previews: Part 2

With the stock market recording another quarter of losses, investment banks are likely to continue to underperform as investors look for safety.

Where's the money?

The bread and butter for investment banks are trading fees. But with investors worried about a recession, they aren't participating in the activities that usually generate bank revenue. Some clear indications are that over the last quarter, reverse repo holdings by the Fed reached a new record high. It would appear funds are parked in cash and even avoiding bonds - meaning less financial transactions for the intermediaries to benefit from. The situation reached the point when Treasury Secretary Yellen expressed concern over tight liquidity conditions.

Morgan Stanley caught in a market glut

Market volatility (and the resulting fees from market making) in the last quarter might give Morgan Stanley extra room for maneuvering with less need to make provisions than commercial banks.

On the other hand, the bank could be facing challenging comparables since the stock market glut has led to fewer IPOs and mergers. Speaking of which, Morgan Stanley is one of the lenders behind Musk's takeover bid for Twitter, and given the deal’s size, it might merit a mention in the earnings report.

MS is expected to report $1.52 on the bottom line, a slight improvement over the prior quarter of $13.3B in revenue, also slightly higher than Q2.

Goldman Sachs vulnerable to trading conditions

75% of Goldman Sach's; revenue comes from its investment banking and markets arm, which makes it one of the most susceptible banks to trading conditions. While liquidity has tightened, volatility has increased, so the question is whether the bank can take advantage of the circumstances.

Last quarter GS had one of the most extensive beats over expectations among the banking sector. Now, analysts are estimating the bank had earnings of $7.75 on revenue of $11.4B.

Bank of America CEO relatively optimistic

BoA is the odd one in this group, having a large retail banking arm and less exposure to markets. Retail bankers are expected to underperform as they provide for potential loan losses ahead of tight economic conditions.

However, BoA's CEO Brian Moynihan is relatively optimistic about the economic outlook, forecasting a soft landing, unlike his colleagues. This could mean BoA will take fewer provisions this quarter and help boost the bottom line. Earnings are expected at $0.78, a substantial improvement from the prior quarter. Revenue is also expected to improve to $25.5B.

Performance comparison

Over the past three months, GS (blue) has gained 4.31% and MS (black) 1.11%, but BAC (orange) lost 2.51%. Shorter-term, however, all three are below the 200-day average of -5.07% in the last thirty days. MS is down the most -9.76% lower, with GS -6.83% and BAC -8.09% in
the red.

GS and BAC have broken above their respective descending trendlines, prompting a potential mean reversion towards the SMA. MS, however, is barely above the Sept. 27 th low. At this pace, GS will be back on track to flipping to positive ~2% higher and BAC 3%, but they would have to maintain their position above the SMA. On the other hand, MS has a more challenging path, as it needs ~5% to catch up with the SMA.

Key takeaways

Investment banks are likely to continue to underperform as investors pile up cash due to recession fears. MS might have to improvise less but face fewer IPOs and mergers. GS is vulnerable to trading conditions, and it's unsure it can repeat last quarter's expectations. BAC might have to improvise less, assuming a soft landing, but is most exposed to retail.