Bank of America forecast a second-quarter loss for Lehman Brothers Holdings and cut its earnings outlook for Morgan Stanley and Goldman Sachs, and said brokers may continue to underperform in the current challenged credit environment.
"On top of weaker activity levels across many areas of investment banking this quarter, this quarter 'basis risk' or the divergence between cash and derivatives spreads is the issue driving substantive mark-downs for the I-banks versus spread widening," Banc of America analyst Michael Hecht said in a research note to clients.
Hecht said a slowing economic growth and large balance sheet exposure to residential and commercial mortgages suggested a lackluster, low-visibility environment for the large investment banks through 2008.
The analyst said he expected Goldman to have the best relative second-quarter results, while he forecast Lehman to have the worst quarter.
Hecht said Merrill Lynch remained his top pick among the large investment banks in the near-term due to the stock's lower "basis risk" -- or the risk that the price of a future will vary from the price of the underlying cash instrument as the future's expiration date approaches -- versus its peers.
Following are the second-quarter and fiscal 2008 earnings estimate changes, and the price target changes made by Hecht on the banks:
Shares of Goldman closed at $172.64 Friday on the New York Stock Exchange, while those of Lehman closed at $36.11. Morgan Stanley's shares closed at $41.83 Friday.