Will Goldman Succeed Where Citi and JPMorgan Failed?

Goldman Sachs (NYSE: GS  ) will release its quarterly report on Thursday, and investors have become more cautious about the pace of its growth in light of recent reports from its peers. With expectations calling for a sizable drop in Goldman earnings, shareholders are bracing themselves to see whether the same problems that plagued JPMorgan Chase (NYSE: JPM  ) and Citigroup (NYSE: C  ) during their respective third quarters have affected Goldman, too.

Goldman is a bank, but its long history as an investment bank gives it exposure that's much different from Citi and JPMorgan, which have huge retail arms. Goldman's focus left it less exposed to the dangers of the initial stages of the mortgage crisis that affected direct mortgage lenders. But as the crisis developed and spread into mortgage-backed securities, Goldman found itself at systemic risk from its broader impact on the capital markets.

Years later, Goldman has seen its balance-sheet health improve substantially, but it still faces greater regulation and the lingering reputation effects from the aftermath of the crisis. Let's take an early look at what's been happening with Goldman Sachs over the past quarter and what we're likely to see in its report.

Stats on Goldman Sachs

Analyst EPS Estimate

$2.43

Change From Year-Ago EPS

(14.7%)

Revenue Estimate

$7.36 billion

Change From Year-Ago Revenue

(11.9%)

Earnings Beats in Past 4 Quarters

4

Source: Yahoo! Finance.

Can Goldman earnings gives investors another surprise?
In recent months, analysts have gotten much less optimistic about the near-term prospects for Goldman's earnings, slashing 15% from their third-quarter estimates. Yet they've boosted their fourth-quarter projections slightly and only cut their full-year 2014 views by about 1%. The stock has been little-changed since mid-July.

Goldman's second-quarter report gave investors an early hint of the struggle the bank has faced lately. Year-over-year results made for fantastic headlines, with net income doubling from the year-ago quarter. That created a massive earnings beat, but behind the headlines, the news wasn't all positive. Revenue at its institutional-client services unit fell by 16%, and both equity-trading and the unit handling trades of fixed-income, commodities, and currency both saw sales fall by more than 20%.

Interest-rate worries have continued to hit Goldman and its banking peers. It's true that retail banks Citigroup and JPMorgan get much more of their overall revenue from net interest income than Goldman does, suggesting that interest rates would have a bigger impact on them than on Goldman. But Goldman does have a substantial bond-trading business, and both Citi and JPMorgan have seen higher rates put pressure on their respective operations in that area. Last month, analysts responded to a shortfall in bond trading at Jefferies Group by downgrading Goldman as well, pointing to the potential for weak results that could hit the company's top line hard.

Moreover, reputational issues continue to plague Goldman. The trial of former executive Fabrice Tourre began in July and ended with a finding of liability in August for defrauding investors with intentionally misleading acts about a complex mortgage-related investment. Tourre appealed and asked for a new trial earlier this month, so the case could continue for some time. Still, Goldman did get a boost to its reputation by being named to the Dow Jones Industrials, and the company has managed to avoid some of the high-profile legal settlements that have plagued JPMorgan lately.

Goldman investors hope the company will benefit from trends toward lower pay for workers in the financial industry. JPMorgan cut 15% from its investment bankers' compensation, reducing its overall overhead and boosting profits. With a large portion of its overall expenses going toward compensation, Goldman stands to gain even more from keeping labor costs in check.

In the Goldman earnings report, watch for signs of whether the investment bank has been able to buck the trends affecting Citi, JPMorgan, and its other peers. If Goldman can succeed where Citigroup and JPMorgan failed, it could point the way higher for Goldman's stock in the future.

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