Goldman Sachs, BofA Reverse Roles With Core Business Disappointments

  • Bank of America beats on trading while Goldman boosts lending
  • Both firms’ stocks jumped more than 30% after Trump’s election

Breaking Down the Earnings From the Big Banks

When Bank of America Corp. and Goldman Sachs Group Inc. posted earnings Tuesday, one had record income from lending while the other had better-than-expected trading. The surprise is which was which.

Goldman Sachs, the vaunted trading house, pointed to growth in its effort to lend to wealthy people as a bright spot. Bank of America, with 4,500 branches across the U.S., relied on a smaller drop from its trading unit to help beat revenue estimates.

Weakness at each bank’s bread-and-butter business sent shares of the firms falling despite both topping profit expectations. Goldman Sachs trailed rivals for a second straight quarter in fixed-income trading, while Bank of America posted a surprise decline in net interest income, which is a fundamental part of banks’ revenue.

The current environment is “creating headwinds in areas that are core strengths for the firm,” Goldman Sachs Chief Financial Officer Marty Chavez said on a conference call with analysts. “We know we need to do better.”

Bank of America and Goldman Sachs were the two best-performing major U.S. bank stocks in the three months after Donald Trump’s election, each rising more than 30 percent as investors bet they’d benefit from relaxed regulation and higher interest rates.

Regulatory Wait

The banking industry is still awaiting changes to regulations, as well as legislation for taxes and infrastructure spending aimed at boosting the economy. The Treasury department last month published a report on how it would like to reshape financial regulation.

“All of them would be helpful,” Bank of America Chief Executive Officer Brian Moynihan told analysts when asked which recommendations would benefit his business most.

In the meantime, the firms are talking up the potential for their core businesses to improve. In the second quarter, Bank of America said, stagnation in longer-term rates and the sale of a U.K. credit-card unit held back interest income. Its shares fell as much as 1.7 percent, and were down 0.5 percent to $23.91 as of 1:54 p.m. in New York.

“What tends to drive Bank of America’s stock is the trajectory of interest rates,” Shannon Stemm, an analyst at Edward Jones & Co., said in an interview. “Given BofA is one of the more interest-rate-sensitive names, there was some disappointment on the net-interest side.”

But the bank said it still expects that revenue to climb in the third quarter.

Commodities Commitment

Goldman Sachs said it’s remaining committed to commodities trading after the worst quarter as a public company in that business, a core franchise that spawned the careers of at least three of the firm’s top executives, including CEO Lloyd Blankfein, co-president Harvey Schwartz and Chavez. Revenue from trading in crude oil, natural gas and metals, among other raw materials, was hurt during the quarter by lower client volumes as well as traders’ trouble navigating tough market conditions, Chavez said on the call.

The company’s stock fell 2.5 percent, the most in the Dow Jones Industrial Average.

Goldman Sachs said net interest income at the bank’s investing and lending unit topped $400 million in the quarter, more than 50 percent higher than the previous record. Bank of America CFO Paul Donofrio said more clients sought financing for equity derivative bets through synthetic products, helping lead to an unexpected jump in stock trading revenue.

The banks haven’t totally swapped identities. Goldman’s interest income won’t be confused with Bank of America’s $11 billion anytime soon. And trading accounts for 16 percent of revenue at the Charlotte, North Carolina-based lender, compared with 40 percent at Goldman Sachs.

Still, analysts asked Goldman’s Chavez multiple questions about its interest income and Marcus, its online consumer-lending product that started in October and recently surpassed $1 billion in loans. Bank of America’s Moynihan, on the other hand, was left helping analysts remember the right moniker for the new system his retail bank is using to let consumers quickly send payments to one another.

“It’s ‘Zelle,’ not ‘Gazelle,’” Moynihan corrected an analyst.

— With assistance by Jennifer Surane, and Sarah Ponczek

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