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Goldman Sachs to report best quarter since financial crisis despite headwinds

This week we’ll get an important read on the financials sector as 5 of the country’s biggest banks report Q3 results, including JPMorgan Chase (JPM), Wells Fargo (WFC), Bank of America (BAC), Goldman Sachs (GS) and Citigroup (C).

Overall S&P 500 financials have decent expectations for 4.5% EPS growth, and even better results of 5.8% on the top-line.

Q3 Bank Earnings
Q3 Bank Earnings

The banks themselves, including Morgan Stanley (MS) which doesn’t report until next Monday, are forecast to grow profits 7%. Excluding Bank of America’s large earnings increase (due to an easy year-over-year comparison), growth for the banks drops to 2%, and overall financials to 3.4%.

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Low interest rates are still haunting banks, with no sign of a rate increase this year, meaning a lack of interest revenue will impact Q4 as well. This is particularly concerning for Bank of America whose balance sheet is highly leveraged to rising interest rates and a steepening of the yield curve caused by its large mortgage book.

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Another headwind for banks this quarter is declining trading revenues. While revenues from equity trading should be strong due to market volatility, it won’t likely be enough to offset declines in fixed income, currency and commodities (FICC) trading.

Weak demand for mortgages has restricted bank’s revenue growth for a considerable amount of time. While mortgage applications slowly made a comeback in the first half of the year coming off a very low base, originations are expected to be low in Q3. The latest forecast from the Mortgage Bankers Association is calling for an 8% quarter-over-quarter decline in home-loan originations, bad news for banks such as Wells Fargo, the country’s largest mortgage lender. However, an increase in commercial real estate lending could help boost the bottom-line.

On the bright side, M&A activity was strong in Q3, which will benefit investment banks such as Goldman Sachs. Completed M&A deals totaled $867B vs. Q2’s $820B (6% improvement QoQ, 40% YoY), making Q3 2015 one of the best quarters since the economic downturn in 2008.

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