Citi Analyst Foresees Tough Times for Banks
A Citigroup analyst on Monday delivered a dismal outlook for investment banks, cutting earnings estimates for
Lehman Brothers
(LEH)
,
Goldman Sachs
(GS) - Get Report
and
Morgan Stanley
(MS) - Get Report
.
Prashant Bhatia lowered his second-quarter forecast for the three banks based on weakness in March and April. Bhatia noted that client-related trading volumes had decreased, deal volume is down and ineffective hedging led to some losses. Although May has improved slightly, he doesn't think it will be enough to save the quarter.
"We expect to see 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," he wrote in the report. "We expect the brokers may take some losses to exit concentrated positions."
Bhatia maintained Lehman's buy rating, but cut his earnings estimate to 5 cents from $1.66. He also kept Morgan Stanley at a buy, but lowered his profit forecast to 75 cents from $1.66. He also cut his price target for the bank to $70 a share from $75 a share. He forecasted a profit of $3.70 for Goldman, down from $4.71 and lowered the stock to a hold rating. The rating is based on valuation and Bhatia suggests that investors can get in at a better price.
The analyst also hopes that the quarter will demonstrate to investors that the worst may be over and that markdowns may be hitting an inflection point. The investment banks have been subject to fair accounting rules in which they have had to mark down inventories to reflect current market pricing. The result has been to admit huge losses due to leveraged loans and the residential mortgage market.
The bright spot for the banks is wealth management and asset management, which are thought to be fairly resilient. However, Bhatia cut estimates for 2009 and 2010 as the area doesn't seem to be enough to bring the banks back to the glory days of 2005 and 2006.
The report pulled down the stocks in early trading, but all three were posting recent gains. Lehman was up 1.5% to $44.28 and Goldman and Morgan were both up fractionally in recent trading.