Bloomberg News

Goldman Sachs, Morgan Stanley Have Estimates Cut on Trading

January 08, 2012

(Updates with additional analysts in the fifth paragraph.)

Jan. 6 (Bloomberg) -- Goldman Sachs Group Inc. and Morgan Stanley, the major U.S. banks most reliant on trading, had their earnings estimates reduced by analysts as a weak fourth quarter dimmed prospects for a capital-markets rebound in the first half of 2012.

Sanford C. Bernstein’s Brad Hintz cut his fourth-quarter estimate for Goldman Sachs by 76 percent and almost quadrupled his expected loss for Morgan Stanley as “already anxious clients grew increasingly cautious,” he wrote in a note to investors today. Doug Sipkin, an analyst at Ticonderoga Securities LLC, lowered his 2012 Goldman Sachs estimate by 23 percent on a more pessimistic view of the firm’s fixed-income trading revenue.

The two New York-based banks will probably still more than double their earnings per share this year, according to analysts surveyed by Bloomberg. The firms’ 2011 results are likely to fall short of estimates made at the start of last year on a decline in trading volume, concern that the European debt crisis would spread and one-time items such as preferred-share redemptions.

“We believe the threat emanating from Europe will dominate customer activity, and we see little hope of any resolution in the first half of the year,” Hintz wrote. “Regulatory concerns and the overall pace of the global economic recovery pose incremental headwinds for the large brokerage firms.”

Through 2013

JPMorgan Cazenove analysts led by Kian Abouhossein cut their earnings outlook for investment banks for 2011, 2012 and 2013, citing worsening conditions in fixed income and equities. In a note today, the analysts lowered their Goldman Sachs 2012 estimate by 19 percent and Morgan Stanley’s figure by 17 percent.

Hintz reduced his fourth-quarter estimate for Goldman Sachs to 77 cents a share, from $3.15, and Morgan Stanley to a loss of 75 cents, from a 19-cent loss. Sipkin dropped his Goldman Sachs fourth-quarter estimate to 97 cents, from $4.12, and now expects a 59-cent loss for Morgan Stanley, after previously estimating a 40-cent profit.

Fiona Swaffield, an analyst at RBC Capital Markets, wrote in a note yesterday that she has cut her 2012 earnings estimates for Goldman Sachs and Morgan Stanley by 27 percent and 33 percent, respectively, since June.

Return on Equity

A “lackluster” estimated revenue increase has led to concerns about the long-term return on equity investment banks can produce, Swaffield wrote. Investment-banking divisions likely had ROE of 5 percent to 9 percent in 2011, when measured against risk-weighted assets calculated under new capital rules known as Basel 3, she wrote.

The lowered earnings expectations didn’t change the analysts’ stock ratings. Abouhossein rates Goldman Sachs and Morgan Stanley “overweight.” Hintz has an “outperform” rating on both and wrote that “current valuation levels imply a near worst case scenario for these stocks.”

Goldman Sachs Chief Executive Officer Lloyd C. Blankfein, 57, said in November that global growth will “snap back” faster than most forecasters expect. He said he didn’t know when that will happen.

Some analysts still see reason for optimism for a rebound in investment-banking and trading revenue, which has likely fallen in each of the past two years. In 2011, global stock offerings plunged 29 percent from 2010 and U.S. bond issuance fell 6.7 percent as companies delayed plans to raise capital, according to data compiled by Bloomberg.

‘Handful of Catalysts’

“We see a handful of catalysts -- like plenty of cash on the sidelines, a pickup in M&A activity, large investment- banking backlogs” and the need for hedge funds to try to outperform their benchmarks, Glenn Schorr, an analyst at Nomura Holdings Inc., wrote in a note today. “That could boost activity levels over the next few quarters.”

If that pickup doesn’t occur, investment banks may chop more jobs, Abouhossein said. Morgan Stanley said last month that it’s eliminating 1,600 positions, and Goldman Sachs said in July it would cut headcount by about 1,000. Staffing at U.S. and European investment banks could fall 5 percent to 10 percent by the second half of 2012, Abouhossein wrote.

“The response of the banks to the lower revenue environment has been less robust than we would have hoped to date,” Swaffield wrote. “So far in 2011, headcount is down to a limited extent versus 2007 pre-crisis, yet revenues are down on average by a third.”

--Editors: Steve Dickson, William Ahearn

To contact the reporter on this story: Michael J. Moore in New York at

To contact the editor responsible for this story: David Scheer at

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