Cheat Sheet: Here's What's Coming In Goldman's Crucial Q3 Earnings

Lloyd Blankfein

Wall Street’s marquee earnings event takes place Tuesday morning when Goldman reports Q3 earnings.

Analysts are looking for EPS of $2.28 on revenue of $7.9 billion, both of which are numbers that have been getting slashed all quarter, as the economy has slowed, and financial markets have weakened.

90 days ago, the estimate on Goldman for this quarter was $4.01, so this number has come WAY down.

Anyway, beyond the headline numbers, there will be a lot of attention paid to the core trading businesses.

Here’s Credit Suisse on Fixed Income Currencies and Commodities:

While credit market conditions were generally healthier during the third quarter, with strong
positive inflows into fixed income products and improving asset prices/tightening credit
spreads, we do not anticipate that this will translate to a material, broad-based rebound in
FICC results for the investment banks. We believe we could see some relative
outperformance in results by those firms with less diverse FICC franchises and more
dominated by the credit and interest rate sub-clusters.

In terms of volumes, U.S. cash fixed income volumes are up modestly quarter-to-quarter
(as reported by the New York Federal Reserve Bank), with interest rate/currency/energy
exchange-traded futures weaker (down 16% on average) following last quarter’s volatility-
driven spike in volumes. With activity levels stable-to-lower in the more vanilla/lower
margin flow products, we anticipate that this weakness has carried over into higher margin
areas of the business.

Given what would appear to be an improved operating environment, why not expect some
improvement? We attribute some of the disconnect between improved primary issuance
and weaker secondary trading activity to the levels of liquidity on the sidelines and
potentially less in the way of rebalancing activity by the client community.

Specific to Goldman Sachs, we are factoring in $3.4 billion of core FICC revenues, down
17% from last quarter and down 46% from last year
. We don’t anticipate much differential
among performance within Goldman’s FICC sub-clusters. 

In addition to core results, we are factoring in $200 million of losses from debt valuation
adjustments (DVA) due to the tightening of Goldman’s credit spreads during the quarter.
Inclusive of this, we expect $3.2 billion of reported FICC revenues.

And here’s the word on the old-style i-banking business:

M&A and Advisory. Completed M&A volume is down 14% from last quarter’s still
fairly weak levels and lagging our expectations for a rebound in broader activity levels.
With regard to the forward outlook, the M&A environment is showing improved signs of
life—the volume of announced M&A increased 28% during the quarter.

 Equity Underwriting. Activity here remained weak for much of the third quarter. The
volume of proceeds is up 16% from last quarter, much thanks to deals completed in
the last few weeks, with related disclosed fees down slightly. The underwriting backlog
remains at record levels.

 Debt Underwriting. Debt underwriting activity remains a bright spot for the brokers
and continues to pace ahead of our expectations. Specifically, investment grade
proceeds are up 47% from last quarter with high yield volumes up 29%. Related
disclosed fees are up 26% qtr/qtr.

Specific to Goldman Sachs, our investment banking expectations are largely
. Based on the available Dealogic data for publicly disclosed deals, we
anticipate that the pace of deal realisation/closings has fared somewhat better for
Goldman than that of the broader peer experience.
All in all, we are factoring in $1.0 billion of investment banking revenues, up 9% from
second quarter results.

By business line: M&A/advisory +6%, equity underwriting +15%, debt underwriting +10%.

And, while we’re at it, principal investments:

We’re forecasting $500 million of principal investment gains for the third quarter, thanks
primarily to further asset price firming and opportunities for write-ups/realisations.
Embedded within our expectations are $35 million of positive marks/realisations related to
ICBC (common shares were up 1% during the quarter) and $465 million of other principal
investment/mezzanine/real estate write-ups thanks to rallying asset prices.

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