Earnings Preview: Bank of America Corp (BAC), Goldman Sachs Group Inc (GS), Morgan Stanley (MS)

The big banks, traditionally the darlings of earnings season, are showing signs of improvement. After JPMorgan Chase & Co. and Citigroup Inc. posted stronger-than-expected results on Tuesday, analysts are looking for similar performances from the other big banks including Bank of America Corp. on Wednesday and Goldman Sachs Group Inc. and Morgan Stanley later this week.

Bank of America, a multinational banking and financial services company, is expected to report a fiscal third-quarter loss of 9 cents per share, excluding items, on revenue of $21.36 billion, compared with a profit of 20 cents per share on revenue of $21.53 billion a year earlier.

The Charlotte, North Carolina-based company saw its quarterly profit drop 43 percent in the second quarter as revenue from mortgages fell and litigation costs jumped. While litigation expenses in the previous quarter soared to $4 billion from $471 million a year earlier, the costs were less than the $6 billion recorded in the first quarter of 2014.

Investment firm Goldman Sachs topped analysts’ estimates last quarter as higher revenue from stock underwriting boosted the company’s profits. The company also reported a smaller decline in fixed-income trading. Goldman is projected to issue a profit of $3.21 per share on revenue of $7.85 billion, compared with earnings per share of $2.88 on revenue of $6.72 during the same period a year ago.

“I expect the best areas of performance from Goldman and Morgan Stanley will be on the investment banking side,” Kenneth Leon, an analyst at S&P Capital IQ, said. “The shareholder question is … when can these banks get back to increased return on equity.”

Another metric analysts are watching for: compensation levels. All the companies are focused on reducing compensation expense as a percentage of revenue to the investment banking segment, or to the overall company.

Morgan Stanley’s quarterly profit more than doubled in the second quarter as stronger performances by its investment banking and wealth management businesses more than made up for a fall in revenue from bond trading. The Manhattan-based company is expected to report a profit of 54 cents a share on revenue of $8.17 billion, compared with EPS of 50 cents on revenue of $8.2 billion.

Earnings results from JPMorgan and Citigroup released Tuesday bode well for the banking sector. JPMorgan posted a third-quarter profit of $5.6 billion, or $1.36 per share, as the company said its legal costs are easing. Revenue came in at $25.2 billion, up 5 percent from the same period a year ago.

Although the bank missed Wall Street's earnings per share estimates by 2 cents, JPMorgan’s earnings were a big improvement from the same period last year, when the bank lost $380 million due to legal bills related to the financial crisis. The latest results included a legal expense of $1 billion after tax.

Citigroup also reported quarterly results on Tuesday, and the bank beat Wall Street EPS estimates by 3 cents. The bank issued an adjusted net profit for the quarter that rose to $3.67 billion, or $1.15 per share, from $3.26 billion, or $1.02 per share, a year earlier.

The Manhattan-based company also announced it would exit consumer banking in 11 markets, including consumer franchises in Costa Rica, Czech Republic, Egypt, El Salvador, Guam, Guatemala, Hungary, Japan, Nicaragua, Panama and Peru, as well as the consumer finance business in Korea. Separately, Citigroup announced it has opened a second internal investigation into fraud in its Mexican unit, Banamex.

Even though JPMorgan and Citigroup each delivered better-than-expected results, analysts are still looking for more double-digit growth from the two banks.

“They [JPMorgan and Citigroup] have commensurate business in investment banking, trading and asset management,” Leon said. “None of the performances on all of those lines, except for maybe its advisory business (M&A), had double digit growth.”

Although Wells Fargo & Co. met Wall Street estimates and saw its profit rise to $5.73 billion, shares fell on Tuesday after the company posted third-quarter earnings of $1.02 per share, excluding items, as revenue increased to $21.21 billion from $20.48 billion a year earlier. The fourth-largest U.S. bank saw a slight rise in income at its mortgage banking unit, which had previously weighed on results over the last year.

Goldman Sachs Group Inc. reports results on Thursday and Morgan Stanley on Friday.