Wall St banks face earnings slowdown

Wall St banks face earnings slowdown
By Ben White in New York
Copyright The Financial Times Limited 2006
Published: August 13 2006 18:06 | Last updated: August 13 2006 18:06


After a blistering first half, big Wall Street investment banks are seeing a significant third quarter slowdown driven by reductions in trading volumes and new securities offerings, and a drop in US mergers and acquisitions.

The slowdown is likely to damp earnings at big brokerages that report quarterly figures next month, including Goldman Sachs, Morgan Stanley, Lehman Brothers and Bear Stearns.

Some of the decline is the result of the traditional summer slowdown in dealmaking, capital raising and trading activity. The third quarter is typically Wall Street’s slowest.

However, several analysts said slowing US economic growth, rising chief executive uncertainty and difficult international markets could exacerbate the usual seasonal trends and cut into the traditional fourth quarter recovery.

“The most important thing to track is global economic growth,” said Bank of America analyst Michael Hecht. “That is the big risk here. I don’t think we will slip into a real recession but if the pace of growth declines, the top line and the bottom line for the investment banks will decline.”

So far, Mr Hecht has not reduced his third quarter earnings forecasts for Wall Street firms, though he said he was keeping a close eye on market conditions and might revisit his predictions later this month.

He said in a research note that he expected a median earnings decline of 18 per cent from the second quarter, in line with typical third quarter slowdowns.

Others have cut their estimates. Guy Moszkowski, brokerage analyst at Merrill Lynch, recently reduced his forecast for Goldman Sachs’ third quarter earnings per share from $3.21 to $2.77. Mr Moszkowski cited a 2 per cent drop in M&A closings from the second quarter and a 10 per cent decline in closings from the third quarter last year as one reason for the revision.

He also said a drop in equity trading could hit Goldman because of the firm’s heavy reliance on proprietary trading.

Firms such as Goldman have become expert in making money in all types of trading environments but equities remain the most sensitive to market trends.

Several analysts also noted that hedge funds, increasingly important trading clients for Wall Street, have become more defensive and less inclined to borrow heavily to make bets. That could take a bite out of fees paid to the big three hedge fund prime brokers, Goldman, Morgan Stanley and Bear Stearns.

Dick Bove, analyst at Punk, Ziegel & Co, suggested in a research note that Lehman Brothers would probably report reduced earnings compared with last quarter as debt issuance had slowed and asset management was not doing as well as predicted. Nonetheless, he believed the fourth quarter would be good for Lehman and other brokers because stocks continue to be undervalued.