Who is banking on BNY Mellon, Goldman Sachs and Wells Fargo’s share prices?

BNY Mellon’s [BK] share price, Goldman Sachs’ [GS] share price and Wells Fargo’s [WFC] share price have looked very different in the run-up to third quarter earnings announcements. Of the three US banks, Wells Fargo’s share price is up the most since it reported second quarter figures on 14 July. The stock has risen 5.9% to $25.68 on 12 October. However, after falling 52.37% in the first half of the year, shares in the firm struggled to recover and are still down 52.22% on the YTD — by far the biggest overall drop compared to its peers.

In comparison, BNY Mellon’s share price has risen 2.58% to $37.81 since it last reported quarterly earnings on 15 July (as of 12 October’s close). The stock previously fell 24.1% in the first half of the year, and is down 25.75% for the year to 12 October.

Goldman Sachs’ share price, meanwhile, has declined a more moderate 8.62% year-to-date, sitting at $214.12 on 12 October. The stock fell 15.66% in the first six months of 2020 and has struggled to recover since. Goldman Sachs’ share price is down 1.28% since it reported its Q2 earnings results on 15 July.

Both Goldman Sachs and Wells Fargo are due to report third quarter earnings on 14 October, followed by BNY Mellon on 16 October. However, despite a struggling economy, some investors are expecting revenues from investment banking and asset management divisions to hold up

Can BNY Mellon keep credit losses to a minimum?

While a bank’s financial performance is usually tied to the health of the economy, BNY Mellon’s varied financial services have kept it largely in the black so far this year.

The firm beat analysts’ expectations on both revenue and earnings in the second quarter, posting $4bn and $1.01 per share, respectively. Todd Gibbons, CEO of BNY Mellon, said at the time that he’d seen “momentum across most of our businesses”, despite credit losses of $143m.

Going into Q3, analysts polled by FactSet expect earnings of $0.94 and provisions for loan loss reserves to be $40bn, significantly less than the $143bn set aside in the previous quarter, MarketWatch reported.

Richard Bove, analyst at Odeon Capital Group, believes Q3 provisions to be “the most critical of any number produced in the quarter”, according to the publication. While he expects “a relatively good set of numbers” across the US banking industry, a negative surprise could send stocks toppling.

Deutsche Bank analysts rate BNY Mellon’s share price a Hold, which is in line with the consensus among analysts polled by MarketBeat, who have an average price target of $44.56 on the stock.

Will it be another monster earnings for Goldman Sachs?

Goldman Sachs’ impressive Q2 results also represented a better-than-expected financial performance in the sector. The investment bank reported earnings of $6.26 per share and revenues of $13.3bn, compared to Refinitiv estimates of $3.13 and $9.76bn.

Heading into Q3, analysts polled by the data provider are predicting earnings growth of 9% year-over-year to $5.22 per share and an 11% revenue jump to $9.25bn.

Brian Gilmartin, a portfolio manager at Trinity Asset Management, believes the stock is cheap at a PE of $15.66 and price-to-book of $0.94 as of 9 October.

In fact, he believes that “it might take until 2021 for Goldman Sachs’ valuation to be realised”, he wrote in Seeking Alpha.“The first stop is likely book value in the high $220s and then ultimately I do think the stock [could] trade to a Jan '20 high of $250.”

As it stands, 24 analysts have a consensus recommendation to buy the stock on MarketBeat,with an average price target of $247.40.

Can Wells Fargo hold onto its cash reserves?

Unlike its peers, Wells Fargo disappointed investors when it posted Q2 results. The firm announced a quarterly loss of $2.4bn, its first since the Great Recession, as it set aside $8.4bn in loan loss reserves.

In an effort to stop the capital outflow, Charles Scharf, CEO of the bank, set out a plan to cut $10bn in annual costs. He estimated that each $1bn drop in expenses could add roughly $0.20 to earnings per share, Barron’ s reported.

Analysts are expecting earnings of $0.44 per share in Q3 and loan loss reserves of $1.9bn, according to FactSet data as reported by MarketWatch. They also have a consensus rating of Hold on the stock on MarketBeat, with an average price target of $31.63.

While US banks are expected to see reduced profits amid low interest rates, there could be an investment case for large financial services firms.