Publish date:

Goldman Lowers Big Bank Profit Views

Goldman Sachs cut its profit view on some large U.S. banks, including Citigroup, saying the capital markets environment took a turn for the worse in the second quarter.



) --

Goldman Sachs

(GS) - Get Goldman Sachs Group, Inc. (GS) Report

lowered quarterly earnings estimates Monday on a number of large U.S. banks, including


(C) - Get Citigroup Inc. Report


Bank of America

(BAC) - Get Bank of America Corp Report

, citing indications that the capital markets environment took a turn for the worse in the second quarter.

U.S. banks with large capital markets businesses could see a 40% sequential decline in pre-tax earnings results from those segments, according to an industry research note by Goldman Sachs analyst Richard Ramsden.

Ramsden estimates that revenue from Fixed Income Commodities and Currency trading plus trading in equities fell 19% quarter over quarter, while investment banking is down 20% in the same period. He projects total revenue from capital markets businesses fell 19% in the quarter, while compensation is down 14% on a sequential basis.

Large banks are also expected to face one-time charges to second-quarter results related to the U.K. bonus tax, the analyst notes.

The comments followed recent meetings with management teams at Bank of America, Citigroup,


(UBS) - Get UBS Group AG Report


Credit Suisse

(CS) - Get Credit Suisse Group AG Sponsored ADR Report



(LAZ) - Get Lazard Ltd Class A Report


Bank of New York Mellon

(BK) - Get Bank of New York Mellon Corporation Report

TheStreet Recommends


The second quarter was a tough quarter for the financial stocks, starting with the mid-April filing of the

Securities and Exchange Commission's

civil fraud case against Ramsden's employer, Goldman Sachs. That news seemed to convince investors the government was serious about taking a hard line on financial reform. Worries about European debt problems, and the pace of the domestic economic recovery also seem to have spooked investors, as the

Dow Jones Industrial Average

dipped back below 10,000 briefly earlier in June.

"The speed of the market decline has made both institutional and retail clients more risk-averse, although there was a disagreement on whether this is a passing vs. lasting trend," the note reads.

Ramsden reduced quarterly projections by an average of 15%, with

Morgan Stanley's

(MS) - Get Morgan Stanley (MS) Report

estimate taking the largest cut of 17 cents a share, because of the challenging trading environment and pressure on net interest income as interest rates remain low.

Still "we assume a rebound in

the second half of 2010 as banks cited the speed of the market decline as the main driver of challenges and client risk aversions," the note reads. "

Thus if the market stabilizes, capital markets revenue could as well."

More on Big Banks Two Questions on the Future of Banking

Ramsden also notes that consumer credit is improving "at a rapid pace" and the growth in emerging markets is a theme that has "long legs." These are key offsets for banks like Bank of America,

JPMorgan Chase

(JPM) - Get JPMorgan Chase & Co. (JPM) Report

and Citigroup (with the emerging markets theme specifically geared towards Citi). Goldman Sachs rates all three firms at buy.

Another takeaway from the U.S. and foreign bank management meetings was worrisome discussion surrounding regulation, particularly future capital standards.

"Capital and liquidity requirements are going up, and in particular, global banks worry about higher standards in their home market well as 'subsidiarization' of capital in foreign markets," Ramsden writes. "

It is uncertain how high capital standards will go and there is a trade-off between safety and economic growth. Thus for now, capital is building, not being returned to shareholders."

Analysts on average, according to

Thomson Reuters

, expect Bank of America to earn 23 cents for the June-ending quarter; Citigroup to make a profit of 6 cents a share; JPMorgan Chase is expected to earn 79 cents a share and Morgan Stanley to post a profit of 69 cents a share. (Goldman itself is expected to earn a quarterly profit of $4.29 a share,

Thomson Reuters


--Written by Laurie Kulikowski in New York.