NEW YORK (
) -- Strong trading revenue has been the saving grace for bank earnings over the past few quarters but Wall Street sentiment is building that business conditions were severely weakened in the current quarter.
Barclays Capital analyst Roger Freeman made massive cuts to his earnings estimates for
on Wednesday, echoing
earlier this month.
"Financial market conditions have deteriorated notably since 1Q10, evidenced by sharply wider credit spreads, cash-derivative basis, declines in structured finance indices, sharply higher volatility and a 'flight-to-safety' trade in less risky assets," Freeman told clients in company-specific research notes related to the call.
He continued: "We believe this market dislocation, while certainly smaller than the dislocations seen in 2008 and early 2009, has impacted broker-dealer revenue generation in terms of client activity levels, trading revenue and investment banking results."
Freeman dropped his estimate for Goldman's second quarter by more than 60%, going to a profit of $1.95 a share from a prior view of $5.35 a share. The change moves Freeman from being well above Wall Street's prior consensus for earnings of $4.29 a share to more than 50% below it.
For Morgan Stanley, he went down almost 30% to earnings of 55 cents a share for the June quarter from a prior estimate of 77 cents, and cited a 63-cent profit as Wall Street's consensus view.
For the whole of fiscal 2010, he now sees earnings of $15.32 a share for Goldman and $2.83 a share for Morgan Stanley. Those estimate compare to prior per-share views of $22.13 and $3.18 respectively.
Freeman left "equal-weight" ratings in place on both stocks but lowered his 12-month price target on Goldman shares to $175 from $195.
Goldman shares, which were down plus 20% year-to-date through Tuesday's close, rose slightly in midday trades to $135.17, while Morgan Stanley's stock, which has declined 15% so far in 2010, were sliding 12 cents to $25.06.
The biggest hit to Barclays' EPS numbers for both firms is Freeman's hefty anticipated sequential declines in revenue from fixed income, currency and commodities, or FICC, trading. He sees a 40% drop in FICC revenue at Goldman to a total of $4.49 billion, and a 30% decline at Morgan Stanley to $1.9 billion.
Other contributing factors are expected to be lower revenue from equities trading and investment banking activities, as well as the one-time impact of the U.K. tax on bonuses, according to Freeman.
Wall Street analysts are becoming increasingly bearish on second quarter earnings as the quarter comes to an end. Goldman Sachs itself on Monday cut estimates on
Bank of America
and Morgan Stanley saying those with large exposure to the
could see a 40% sequential decline in pre-tax earnings results from those segments.
The sideways trading for the big banks on Wednesday may be attributable to Congress getting set to debate the controversial Volcker Rule, which will set limits on proprietary trading. The anticipated impact of the rule on bank bottom lines varies with every new report of how strict the proposal will end up being, so it's difficult for investors to draw any conclusions at this point.
The House and Senate conference committee is scheduled to begin discussing a number of proposals, including the Volcker Rule, this afternoon as Congress works to finalize its giant financial before the July 4th holiday.
Some compromises have already been made. According to the latest reports, the committee has agreed to the newly created Consumer Financial Protection Agency being part of the
, rather than a standalone entity. In addition, Senator Dick Durbin's amendment concerning debit card interchange fees also reportedly was passed, albeit in a somewhat softer form.
But the Volcker rule, which bans banks from sponsoring their own hedge funds as well as using its own money to trade, if passed in its original form would put a meaningful dent in future bank profits. As a result, its provisions have been the target of aggressive lobbying efforts by the banks, and it looks like Wall Street may be winning.
According to a
article, Senate conferees are expected to offer language to the proposal that would apparently leave banks able to sponsor hedge funds and invest limited amounts of their own money alongside client funds.
--Written by Laurie Kulikowski in New York.