Goldman and BofA fail to finesse tax bombshells

What’s not to like?

Post-earnings trading didn’t quite work out according to ‘plan’ for the final two U.S. megabanks to report final-quarter earnings for 2017. Like their rivals JPMorgan and Citigroup, both Goldman Sachs and Bank of America, beat forecasts—excluding multibillion one-time hits from the revised tax rules. But not only did BofA and GS shares tank in the wake of those earnings, their falls pulled down stocks across the bulge bracket as well. At the time of writing, shares in Wells Fargo, Morgan Stanley and JPM had turned green again, but BofA and GS—which beat forecasts on an adjusted basis with 47 cents and $5.68 per share respectively—continued to lick their wounds. In other words, Wall St had found something not to like.

Goldman’s markets no-show

In Goldman’s case, the group traditionally known as Wall Street’s banker failed to show up even compared to another flaccid quarter for JPMorgan’s and Citi’s markets businesses. Fixed income trading tanked 50% at GS, compared to the next worst bond trade performer, JPM, which saw a 34% decline. Commodities were even worse at Goldman, yet it now has the largest commodities desk among close peers. For Goldman, then, the stock price thumbs down looked like impatience. Investors want GS to reallocate resources faster; to better prospects like new online franchise Marcus, and M&A where revenues rose 76% in Q4. There’s little reason on the basis of the quarter’s trading to expect Goldman shares to close the gap anytime soon. GS is up 7% over a year compared to next ‘worst’ share Morgan Stanley, up 29.6%.

BofA growth hits a speedbump

For smallest mega-lender, BofA, with assets of ‘only’ $2.2 trillion against JPM’s $2.53T, the lack of shareholder applause is partly explained by a rip-roaring 2017. The stock ramped to a third higher than book value as BofA mounted a campaign on loan growth, ending the year with a 22% rise. That compares to the competition which all saw loans decline. Does this mean BofA is ready to crack the sustainable 10% return on equity widely regarded as necessary for any large lender to be profitable? With costs amounting to over 60% of revenue (more than JPMorgan and Citi) and a 9% RoE in 2017, even at its new lower tax rate, it’s easier to see why BofA investors are cooling. Still, BofA got more things right last year than wrong. If the group stays on that track, its shares should rise more slowly this year, not reverse.

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