Six Banks Set for a Third-Quarter Earnings Implosion
Analysts at Citigroup and UBS lowered their earnings estimates Monday for Goldman Sachs, Morgan Stanley and other universal banks, on expectations the barren landscape in the equity and credit markets would persist for several quarters.
With the euro-zone debt showing no signs of speedy resolution and global growth expectations declining, the third quarter operating environment for banks with significant capital markets businesses will be very challenging, according to Keith Horowitz at Citigroup .
The analyst also slashed estimates for 2012 and 2013 earnings.
"Forecasting trading revenues one quarter out is challenging, let alone trying to estimate 2013. That said it's hard to assume as a base case that global trading pool revenues increase meaningfully vs 2011 levels with a weak economic outlook plus continued uncertainties regarding impact of regulation and higher capital requirements," he wrote in a note.
UBS analyst William Tanona also expects current headwinds to hinder universal banks and brokers for a number of quarters.
"A longer-term view than we originally anticipated is required," he said. "However, we believe valuations have already contracted to a level that reflects the challenging near-term operating environment."
Shares of Goldman Sachs dipped briefly below $100 for the first time since March 2009 on Monday. The stock of Morgan Stanley shed 2.7 percent to $14.87, also Monday.
Here is a look at the analysts' recent changes to price targets and estimates.
6. Bank of America
Citigroup lowered Bank of America's price target to $11 from $14 earlier.
Bank of America is expected to report earnings per share of 61 cents, including one-time gains such as the sale of China Construction Bank stake.
The analyst lowered his 2012 EPS for the stock from $1.10 to $1.05. He dropped the 2013 EPS to $1.40 from $1.50 earlier. However, he maintained his buy/high-risk rating on the stock.
"We believe BAC represents the best value in the group trading at a discount to the group on normalized earnings. BAC is highly levered to an improved economy, which we believe will take a while to materialize. However, we believe the valuation discrepancy is too wide, and continues to offer investors the best way to invest in the banking sector," the report said.
UBS analyst William Tanona reduced his price target of $7.50 for Bank of America, down from $10.50. The price target values the stock at 0.6 times its expected tangible book value in the second quarter of 2012. His estimate for 2012 and 2013 are identical to that of Horowitz.
UBS slashed its price target for Citigroup by more than 20 percent to $43 from $56 previously.
The analyst expects the bank to continue to benefit from its global presence but says it still has major challenges in the near-term, which it is working through.
"Citi's results will be more volatile than peers, which will require greater patience to reap the benefits of this franchise," the analyst wrote.
He reduced Citi's third-quarter earnings estimate to 76 cents from 88 cents. For 2011, the bank is expected to earn $3.75 per share, against an earlier forecast of $4.05. Estimates for 2012 were cut to $4.80 from $5.30 previously.
4. JPMorgan Chase
JPMorgan Chase remains Citigroup's best pick in the near term as it is "a high-quality franchise on-sale." "Heading into the quarter our favorite name is JPM, as we believe results could benefit from a modest boost in mortgage banking, EPS is less levered to equity markets than GS & MS, and has a stronger balance sheet than BAC," Horowitz wrote.
Still, he dropped his price target to $48 from $54. EPS estimates for 2012 were lowered to $5.15 and $5.75 and 2012 estimates were cut from $5.45 and $6.15 earlier. UBS has a $49 price target for JPMorgan, down from $54 earlier. He lowered 2012 earnings estimates to $5.40 from $5.60, and 2013 estimates to $6.25 from $6.30.
3. Goldman Sachs
Horowitz slashed the third-quarter estimates for Goldman Sachs to a mere 10 cents from $ 2.70 earlier.
The investment bank has "no shortage of earnings challenges" in the third quarter, given "Given weaker than expected 3Q trading environment, declines in I-banking volumes, combined with expected impact from lower global equity markets and wider credit spreads hurting Goldman's large Investing & Lending exposures," the the Citigroup analyst wrote.
He also lowered sharply his estimates for 2011 and 2012 EPS to $6.50 and $13.70 respectively from $10.70 and $16.90 earlier.
The stock's price target was also cut to $140 from $180 reflect higher cost of equity assumptions.
UBS's Tanona also reduced price target for the stock by 25 percent to $150 to reflect lower earnings estimates.
2. Morgan Stanley
Morgan Stanley surprised expectations in the second quarter with its superior fixed-income performance but analysts still expect the bank to earn less than its cost of equity in coming years.
Keith Horowitz reduced his price target to $18 from $26. He also lowered 2012 and 2013 earnings per share estimates by 9 percent and 5 percent respectively, on expectations that market share gains in fixed income will remain a challenge.
Horowitz expects the stock to trade sideways unless the company achieves progress in increasing its market share in fixed income by 2 percentage points, improve margins in its wealth management business or meets its cost-saving target of $1 billion by end of 2014.
UBS's Tanona reduced the price target on the stock to $16.50 from $25. He has a neutral rating on the stock.
"We believe it may take the management team time to turn the franchise around and would rather invest in names with more visible catalysts."
Citi's Horowitz lowered his price target for Lazard to $38 from $42 and lowered estimates for the second half of 2011 to reflect the slowdown in deal activity.
He has a buy rating on the stock, however, calling it a "clean" financial story.
"While stock has been weak reflecting lower M&A and asset management outlook, we see LAZ as "clean" financial story with no real Euro sov risk, and expect LAZ will be among first to recover in economic upturn given leverage to M&A cycle & higher equity markets," he wrote.
Positive catalysts also come in the form of greater buybacks, he added.
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