GO
Loading...

Wall Street Banks Have Profit Outlooks Cut Again

Citigroup slashed its earnings outlook for Wall Street investment banks, Goldman Sachs Group, Lehman Brothers Holdings and Morgan Stanley, citing a tough operating environment.

The second quarter has seen lower client-related trading volumes, little banking activity, losses related to ineffective hedging and reversals of gains on fair valuing liabilities, Citigroup analyst Prashant Bhatia wrote in a note dated May 16.

New York Stock Exchange (NYSE)
Oliver P. Quilla for CNBC.com
New York Stock Exchange (NYSE)

Bhatia, who is the latest in a growing line-up of Wall Street analysts to cut estimates on U.S. investment banks, said he expects significant asset sales related to leveraged loan inventory, and commercial and residential mortgages as a result of a greater degree of liquidity in the marketplace.

"We expect the brokers may take some losses to exit concentrated positions," he said, adding that although the operating environment appears to have improved considerably this month, it will not offset the weakness seen in March and April.

Second-quarter results could be a catalyst for restoring investor confidence that the worst of the markdowns have been taken and that balance sheets have been considerably de-levered and significantly de-risked, Bhatia said.

The analyst rates Lehman and Morgan Stanley "buy," and Goldman Sachs "hold." He cut his target on Morgan Stanley stock to $70 from $75.

Goldman Sachs shares fell nearly 1 percent to $185.77 in morning trade on the New York Stock Exchange.

Shares of Lehman were down nearly 1 percent to $43.27, while Morgan Stanley shares were down 37 cents to $46.84.

The Amex Securities Broker-Dealer Index, which includes Lehman and Morgan Stanley, has fallen 16 percent this year as the effects of the subprime mortgage crisis, credit crunch and housing slump reverberate.

Banks

  • Richard Kovacevich in 2007.

    There were only 20 banks that caused the crisis, and "they're all gone," former Wells Fargo CEO Dick Kovacevich told CNBC.

  • How much the banking industry has changed since the collapse of Lehman Brothers, with Richard Kovacevich, Wells Fargo former chairman and CEO.

  • How much of a game changer is Apple Pay? Max Wolff, Manhattan Venture Partners chief economist, and Hans Morris NYCA, discuss the mobile pay ecosystem and why Apple Pay will succeed where others failed.