Earnings Estimates Cut for Top Investment Banks

By Kulikowski, Laurie | American Banker, May 18, 2005 | Go to article overview

Earnings Estimates Cut for Top Investment Banks


Kulikowski, Laurie, American Banker


Second-quarter earnings at bulge-bracket investment banks are likely to be affected by a trading environment that analysts say has weakened since the year began.

According to Lauren Smith and Richard Herr of Keefe, Bruyette & Woods Inc., who issued a joint research note Monday, lower trading volume will prevent several of the leading investment banks from reporting the high revenue they did in the first quarter.

Ms. Smith and Mr. Herr cut their quarterly per-share earnings estimates on four firms: Goldman Sachs Group Inc. by 23 cents, to $2.07; Morgan Stanley by 6 cents, to $1.14; Merrill Lynch & Co. by a nickel, to $1.15; and Lehman Brothers Inc. by 4 cents, to $2.24.

Goldman, Morgan Stanley, and Lehman will end their fiscal second quarters May 31; Merrill's second quarter will end June 30.

They did not lower estimates for Bear Stearns Cos. Inc., which also ends its quarter this month.

First-quarter profits benefited from "surprisingly resilient momentum" in fixed-income products in both primary issuance and secondary trading, Ms. Smith and Mr. Herr said.

Most New York investment banks benefited last quarter from solid fixed-income business -- particularly in high-yield and corporate bonds -- despite rising rates, and mortgage and interest rate products generated "considerable customer flow," they wrote.

But "given the overly zealous expectations coming off of the robust fiscal year first quarter, what we are witnessing now is an adjustment," the two analysts wrote.

Other negative factors will contribute to lower revenue this quarter, Ms. Smith and Mr. Herr said, including a jump in oil prices, interest rates' continued rise, and Moody's Investor Service's recent credit downgrades of General Motors Corp.'s and Ford Motor Co. …

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