Profit Expectations Down for Big Investment Banks

By Kulikowski, Laurie | American Banker, September 1, 2006 | Go to article overview

Profit Expectations Down for Big Investment Banks


Kulikowski, Laurie, American Banker


Three analysts who cover investment banks are expecting generally weak fiscal third-quarter results from some of the largest ones.

Brokers reported record second-quarter earnings on the strength of capital markets activities and investment banking business, but the analysts concluded that a seasonal earnings decline at the biggest brokers may be slightly worse than usual.

Earnings of large investment banks are frequently a bellwether for large retail banks, including three with substantial investment banking businesses: Bank of America Corp., JPMorgan Chase & Co., and Citigroup Inc.

The third quarter ended at some of the largest investment banks on Thursday. Despite the tempered expectations for investment banks, Michael Mayo, an analyst at Prudential Equity Group LLC, said Bear Stearns & Co. Inc. and Morgan Stanley might post better profits than he initially expected for the fiscal third quarter.

Bear Stearns' "revenue and earnings, though down about 15% and 25% respectively from record levels reported in the prior quarter, appear to be a bit stronger than we had anticipated," he wrote in a research note issued Thursday.

Mr. Mayo increased his third-quarter estimates on Bear Stearns by 14 cents, to $2.84, and by 15 cents for fiscal 2006, to $13.10, and said mergers and fixed-income trading were shaping up to be better than he expected. He rates the company "neutral."

He said Morgan Stanley should have better retail brokerage and investment banking results than he expected. He raised his earnings estimates by 10 cents for the quarter, to $1.38 per share, and by 10 cents for the year, to $6.15. He rates the company "overweight."

Morgan Stanley will probably report a drop in trading revenue, because rates and currencies "remained range bound" for most of the quarter, but that may have been offset by gains in its commodities business, Mr. Mayo wrote. In the company's equities business, he wrote, "less primary issuance and cash equity activity were likely mitigated by prime brokerage and derivatives products, which we believe held up better."

Mr. Mayo was less optimistic about Goldman Sachs Group Inc. …

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