The well-known US banking firms, including Bank of America (NYSE: BAC) and Goldman Sachs (NYSE: GS) have reported their quarterly earnings this week. Wall Street was keeping an eye on financial services firms’ quarterly results to know the impact of COVID-19 and how the economy is going to emerge from the pandemic.
During the second quarter, there were both positive and negative forces, reflecting the near term economic challenges related to recent business shutdowns. In the US, the better-than-anticipated 18% recovery in retail sales and the improvement in unemployment showed the signs of improving economy.
During the three months ended June, S&P 500 jumped by 20%, marking its best quarter since 1998. In the same period, global equity markets also rose similarly. Consumers and small businesses have benefited from government stimulus and deferrals on loan payments from banks.
When addressing the analysts yesterday, BofA’s CEO Brian Moynihan stated that economic predictions have been revised and the forward path has deteriorated from last quarter. He added that the projections now extend the length of the recessionary environment deep into 2022.
The Charlotte, North Carolina-based banking giant’s profit plunged 52% in the second quarter of 2020, hurt by the higher provision for credit losses. Revenue dropped 3% year-over-year to $22.3 billion. Net interest income dropped 11%, driven by lower interest rates. Offsetting this, loans and leases increased 11% and deposits rose 21% in the quarter. CEO Brian Moynihan described the second quarter as the “worst economic quarter since the Great Depression.”
Goldman Sachs results
Goldman Sachs reported a 41% growth in revenue and 8% increase in EPS in the second quarter despite higher credit provisions and litigation expenses. Investment Banking and Global Market segments reported strong performance due to clients’ increased level of activities.
While M&A announcements have slowed down recently, the New York-based banking firm expects a potential pickup in the second half. M&A transactions in the second quarter were down 75%. CEO David Solomon stated,
“I don’t believe that we’ll see short-term activity but I would expect over the course of the next 2 to 4 quarters, those activity levels will build, as we have a clear understanding as to the overall direction of the healthcare issue that we all face, and the overall economic impact that comes out of this.”
When asked what the company would advise its clients at a time when the COVID cases are going up, CEO David Solomon answered, “It’s unclear how active we’ll be in the third quarter, but there will be activity, we’ll be open and at the end of the third quarter, we can kind of look back and say how that unfolded.”
BAC stock closed down 2.72% at $23.93 yesterday, while GS stock closed down 1.03% at $214.67. The current price target for BAC is $28.53 and for GS is $243.08. The S&P 500 Financial sector index has fallen 22% since the beginning of this year compared to negative return of 32% for BAC and a drop of 7% for GS. Analysts covering BAC and GS are recommending to either Buy or Hold them. None of the analysts covering these two stocks have given them Sell rating.
Both the banks are well managed. But considering the recently ended “quarter’s performance and their year-to-date stock movements, Goldman Sachs is performing ahead of Bank of America and remains a better choice than the latter.
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