With just a week remaining in the second quarter of the current year and the earnings season in sight, it’s important to know what to expect from your favorite banking stock when it discloses its performance in the current quarter. This article features the second-quarter earnings outlook for Goldman Sachs Group Inc (NYSE:GS) and Morgan Stanley (NYSE:MS).
The second quarter
The second quarter of the current year was marked with climbing interest rates due to the confusion surrounding the unwinding of the third round of quantitative easing. The interest rates, as denoted by the 10-year Treasuries, have reached 2.52% from 1.86% at the beginning of the quarter. Overall, business conditions remained mixed and uneven, largely led by global debate over monetary policy.
Other highlights of the quarter include continuous demand by the regulators to improve the banking system’s stability by increasing individual banks’ capital bases so that they can withstand another severe financial crisis. Anticipating stringent capital requirements from the regulators, the banks have come up with their own coordinated plan to make the system more stable.
Within investment banking, the industry-wide investment activity has broadly improved with healthy new issue activity offsetting continued weak industry-wide merger and acquisition volumes.
The advisory activity, which includes merger and acquisitions (M&A), remained weak during the second quarter. M&A volumes were down 13% from a quarter ago. Even more disappointing is the fact that pipeline of the newly announced M&A volumes is down another 16% over the prior quarter, and the industry backlogs are now at the lowest levels in nearly two decades.
The tone within equity underwriting remained positive during the quarter but stalled in June. Going forward, a sustained recovery is seen in the activity levels for the remainder of the year given the still positive tone of the equity markets and some digestion of the current backlog.
Solid expense and capital management
Looking at the situation, Goldman Sachs Group Inc (NYSE:GS) is expected to produce impressive investment banking results for the second quarter, particularly on account of better than anticipated underwriting revenue over the course of the past couple of months. While a stronger investment banking top line is expected, it will still be behind the first quarter’s revenue.
At the same time, the revenue coming from Fixed Income, Currencies and Commodities (FICC) sales, and trading are also expected to plunge another 20% over the prior quarter due to the more challenging market conditions during the second quarter. Asset prices of most of the fixed income instruments are down so far during the quarter.
Better expense management will remain one of the key drivers of the second-quarter results. Compensation expense is accrued at 43% of revenue, in line with the first quarter accrual level, while stable non-compensation expenses are also expected.
