Goldman Sachs, Morgan Stanley Get Analyst Love

NEW YORK ( TheStreet) -- Credit Suisse analyst Howard Chen raised his full-year earnings estimate for Goldman Sachs ( GS) for the first time in two years Friday, on the back of an improving outlook for capital markets revenues.

First quarter estimates for the investment bank rose to $3.60 on the back of a "stronger sales and trading businesses and higher investing- and- lending-related gains." The estimate for 2012-2013 climbed to $12.25/$15 respectively. The analyst has a target price of $145 on the stock.

"We believe first quarter results will represent a strong recovery in revenue generation from very anemic second half 2011 levels-key drivers include the significant credit spread tightening, rebound in risky asset prices and typical seasonal lift in results," Chen wrote in a note. "With that said, we are mindful that it's early in the recovery-both primary and secondary equity volume and M&A remain weak and the potential for a new negative looms outstanding (oil, Middle East, regulation). Top-line aside, we expect Goldman to remain disciplined and active on the expense and capital management front."

Chen makes no comment on the recent controversy stirred by a former employee's public resignation letter in the New York Times op-ed, which described Goldman's culture as "toxic and destructive".

The analyst maintained his outlook for Morgan Stanley ( MS), adding that the bank had begun the year with a "solid(but not rip-roaring" start. "While we expect the material YTD credit spread tightening, asset price appreciation and typical seasonal lift will drive a rebound in fundamentals from very weak second half levels for MS and peers (mostly focused in sales and trading and asset/wealth management businesses), we are mindful that the current environment is still "glass half full/glass half empty" and somewhat less suited for Morgan Stanley's business mix (more exposure to equities and retail businesses/less leveraged to more improved mortgage and credit businesses)," the analyst wrote.

Still Chen rates the stock an outperform on expectations that "franchise restoration, healthier market conditions and the absence of new negatives from here could drive share outperformance."

Other analysts have also raised their estimates for the investment banks. RBC Capital analyst Fiona Swaffied, who has long been bearish on Goldman and Morgan Stanley, upgraded both stocks to sector perform from underperform on Friday.

"The impact of regulation on long term returns remains uncertain but we are more constructive on the volume outlook for Investment Banking, which is some 70% of pre-tax at GS," she wrote in a note upgrading Goldman Sachs. The price target on the stock was raised to $130.

The analyst also raised her first quarter estimate for Goldman Sachs driven by rising asset prices, strong fixed income revenues and the benefits of cost cutting. "

Morgan Stanley could benefit from owning a greater stake in the Morgan Stanley Smith Barney Joint Venture, according to Swaffield. The company has the option to buy an additional 14% stake in the venture from Citigroup ( C) in May; some analysts anticipate that the investment bank may choose to buy a bigger stake if Citi agrees on price.

"Strategically owning more of MSSB makes sense given the low capital intensity of the business and the scope for the margin to rise over time. We would not expect MS to have to pay a significant premium if any to what it is currently held at in its accounts. Any earnings uplift from buying out the option is expected to be gradual partly due to the current low level of MSSB earnings," Swaffied wrote.

Shares of Morgan Stanley were up 2% in morning trading Friday, while Goldman Sachs shares were up slightly by about 0.4%.

--Written by Shanthi Bharatwaj in New York.

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