Goldman Sachs Crushes Estimates as JPMorgan Posts a Rare Miss, Opening a Split Wall Street Earnings Season

Wall Street's biggest banks opened the third-quarter earnings season on October 13 with results that pointed in strikingly different directions. A trading boom lifted Goldman Sachs to a blowout quarter, Citigroup delivered its strongest third-quarter revenue in a decade, and JPMorgan Chase, usually the most dependable of the group, fell short of analysts' expectations.

The results offered investors an early read on the health of the US economy, corporate dealmaking and the impact of rising interest rates. On balance, they suggested that capital-markets businesses are thriving, while the traditional engines of banking face a more complicated environment.

Goldman's equities machine

Goldman Sachs reported net revenues of $18.68 billion for the quarter ended September 30, up 23% from a year earlier. Net earnings reached $5.29 billion, or $17.01 per diluted share, far above the roughly $13 a share analysts had forecast and up from $12.25 a year earlier. Its annualised return on equity was 18.7%.

The star performer was equities trading. Revenue from that business surged 72% to $6.44 billion, driven by strong client activity and prime brokerage, where Goldman lends to and services hedge funds. Its Global Banking & Markets division, which houses trading and investment banking, posted revenues of $13.46 billion, up 32%. Investment banking fees rose 21% to $3.22 billion, while fixed income, currencies and commodities revenue was broadly flat at $3.47 billion.

The asset and wealth management division grew revenues 14% to $5.05 billion, and assets under supervision climbed to $4.10 trillion, helped by $83 billion of net inflows. The one weak spot was Platform Solutions, the remnant of Goldman's consumer push. Its revenue fell 72% to $170 million, mainly because of markdowns on the Apple Card loan portfolio.

Goldman returned $4.49 billion to shareholders in the quarter, including $3 billion of share buybacks, and declared a quarterly dividend of $5.00 per share. Its shares rose almost 4% in early trading, leading bank stocks higher.

JPMorgan's rare stumble

JPMorgan, the largest US bank by assets, reported earnings of $5.57 per share, short of the roughly $5.90 analysts had expected. Excluding $658 million of losses on securities, earnings were $5.75 a share. Net revenue rose 8% to $50.2 billion, also below forecasts, and net income climbed 6% to $15.3 billion.

The shortfall reflected weaker-than-expected fixed-income trading and expenses that grew faster than revenue. Total trading revenue rose 15% from a year earlier to $10.3 billion but slipped from the previous quarter and came in slightly below expectations. Investment banking fees rose 14% year on year but fell 8% from the second quarter.

There were bright spots. Net interest income, the difference between what the bank earns on loans and pays on deposits, rose 13% to about $27 billion, and JPMorgan raised its full-year net interest income guidance to $106.2 billion, a sign that higher rates continue to support the core lending business.

Chairman and chief executive Jamie Dimon struck a characteristically cautious tone. He said the US economy remains strong, supported by business investment and steady consumer spending, but warned that "large fiscal deficits, sticky inflation, elevated asset prices, rising interest rates and geopolitical conditions" continue to shift under the surface. Those forces may prove manageable, he said, but the bank remains prepared for a wide range of outcomes.

Citi's turnaround gathers pace

For Citigroup, the quarter offered further evidence that chief executive Jane Fraser's multi-year restructuring is paying off. Revenue rose 8% to $23.8 billion, the bank's best third quarter in a decade, and net income jumped 40% to $5.2 billion. Earnings per share were $2.85, and return on tangible common equity improved to 11.5%.

Growth was broad-based. The Services division, which handles treasury, trade and securities services for corporations and institutions, grew revenue 15% to $6.6 billion. Markets revenue rose 6% to $6.1 billion, led by a 14% increase in equities. In banking, equity capital markets revenue surged 77%, reflecting a busier environment for listings and share sales. The wealth business grew revenue 15%.

Fraser credited the results to steady execution of the bank's strategy and said Citi expects to beat its annual return target while continuing to invest in growth and artificial intelligence. Citi returned $4.1 billion to shareholders in the quarter.

Wells Fargo: profit up, revenue lagging

Wells Fargo reported earnings of $1.87 a share, up 13% from a year earlier and ahead of forecasts. Revenue rose only about 2%, however, and fell short of consensus. Average loans and deposits each grew 11%, a sign that the bank is using the freedom it gained after regulators lifted its long-standing asset cap.

Markets revenue was flat year on year, below the bank's expectations, which management attributed to a late-September rise in interest rates that dampened client activity, even though equities revenue rose 21%. Chief executive Charlie Scharf said the results showed "broad-based growth, higher earnings, and stronger returns," and insisted the bank would not shrink its trading business to flatter its margins: "We are not reducing markets to hit a NIM number."

The backdrop for all four banks is a Federal Reserve that has turned more hawkish this year as inflation has proved sticky. A weak September jobs report, which showed the US economy adding just 29,000 positions, led traders to scale back bets on another rate increase, but the September consumer price data due this week could quickly revive them.

What the numbers say about the economy

Read together, the results describe an economy and financial system running at two speeds. Capital markets are buoyant. Stock markets have been trading near record highs, equity issuance is recovering, and hedge funds and other active investors are trading heavily. That is a bonanza for banks with large trading and prime brokerage operations, such as Goldman and, to a lesser extent, Citi.

Traditional lending is a more mixed picture. Higher rates support net interest income but also raise borrowing costs for households and businesses and increase the risk of loan losses over time. Federal Reserve officials have recently noted that higher bond yields are already curbing demand in interest-rate-sensitive parts of the economy.

Investors will get more evidence soon. Bank of America and Morgan Stanley report on October 14, the same day as the September US consumer price index, which will shape expectations for further Federal Reserve action. For now, the first round of results suggests that Wall Street's trading desks are carrying the industry while bankers keep a wary eye on the economic risks Dimon described.