Don't expect the same exuberant response to U.S. investment bank earnings reports.
Indeed, Wall Street analysts are expecting a very different set of results from the U.S. investment-banking sector, when giants Goldman Sachs Group Inc. (NYSE: GS) and Morgan Stanley (NYSE: MS) report their third-quarter results this week. Goldman reports today (Tuesday) and Morgan Stanley tomorrow (Wednesday).
Analysts started reducing profit forecasts on the U.S. investment-banking sector back during the summer – and with good reason: Uncertainty about the strength of the economic recovery – and worries about the Bush tax cuts and the midterm elections – have led to a major drop-off in such important businesses as fixed-income trading.
Dealmaking volume – thanks to the spike in mergers and acquisitions – enjoyed an advance in August. And fees from bond underwriting could at least partly offset drop-offs in the equity-underwriting and advisory businesses.
But it won't be enough: As a result, analysts are forecasting an overall decline in investment-banking revenue from last year's third quarter.
Even Citi felt the squeeze: Its securities-and-banking division – which includes the firm's institutional-trading and investment-banking businesses – reported third-quarter revenue of $5.59 billion. That was up 14% from the 2009 third quarter – but represented a 6% decline from the second quarter – a so-called "sequential" decline that hints at a near-term downward trend in that part of Citi's business mix.
Once-Hot Goldman Sees Business Cool
The New York-based Goldman Sachs is expected to report a profit of $2.38 a share on revenue of $7.9 billion, according to Thomson Reuters estimates. Both those figures represent major declines from the year-ago period, when the biggest of the U.S. investment banks said it earned $5.25 a share on revenue of $12.4 billion.
According to the Dow Jones News Service, a key issue is that revenue from trading is projected to be even lower in the third quarter than it was in an "already-weak" second quarter – even with a surge in activity that was seen in September.
In the first quarter of the year, Goldman Sachs traders made money on every single one of the quarter's 63 trading days – suffering no losses. Making money on every single day of the first quarter was something that the firm has never accomplished before, Bloomberg Businessweek reported.
The firm recorded net trading revenue of $25 million or more on each of the 63 days, the company disclosed in filings with the U.S. Securities and Exchange Commission (SEC). In fact, Goldman reaped more than $100 million on 35 of the days, or more than half the time, Bloomberg said.
All told, Goldman generated a Wall Street-leading $9.74 billion in revenue during the first quarter – meaning trading accounted for 76% of the company's total revenue in the first three months of the year.
More recently, Goldman has pulled back on the amount of money it's putting at risk in trades. This step back in trading will offset any gains the firm might have enjoyed from the revved-up M&A market. And Wall Street analysts are forecasting that fee revenue generated by the asset-management side of the business was likely to be flat or even down.
It's like that all across Wall Street, according to an analyst who covers the sector.
"Mounting anxiety stemming from a waning economic recovery and uncertainty over the midterm elections left clients paralyzed [which is why Wall Street] trading desks fell silent during the (third) quarter," Brad Hintz, an analyst with Sanford C. Bernstein & Co. LLC, wrote in a recent note to clients.
Morgan Fails to Repeat Second-Quarter Magic
When Morgan Stanley reports tomorrow, the company is expected to earn 16 cents a share on revenue of $6.4 billion, according to Thomson Reuters estimates. In the year-ago period, Morgan Stanley reported a profit of 38 cents per share on revenue of $8.7 billion.
During the second three months of the year, Morgan posted "a rare earnings victory" over Goldman Sachs, Dow Jones said.
That won't happen this time. A super-tough operating environment means that there won't be a second-quarter repeat, when Morgan Stanley's results were supercharged by sales and trading revenue.
In fact, thanks to the way credit spreads narrowed during the recently concluded third quarter, analysts are predicting that Morgan Stanley will post a debt-valuation-adjustment (DVA) loss within its trading operations of as much as $700 million, Barron's reported earlier this month.
Expect wealth management to be a major area of focus for analysts: Morgan Stanley will be reporting the first comparable period of results for its Morgan Stanley Smith Barney brokerage joint venture. Citigroup, which is part of the JV, yesterday reported that Morgan Stanley Smith Barney's third-quarter results were flat from the previous quarter.
Citigroup shares advanced 22 cents each, or 5.57% to close at $4.17 yesterday. Goldman Sachs shares rose $3.01 or 2.0% to close at $153.70. Morgan Stanley shares climbed 38 cents or 1.52% to finish the day at $25.40.
[Editor's Note: In a related story in today's edition of Money Morning, columnist and former global merchant banker Martin Hutchinson examines whether the " bonanza" is over for the U.S. investment-banking sector. To see that story, please click here.]
News and Related Story Links:
Citigroup's profit rises as credit provisions fall.
- DailyMarkets Inc.:
Citigroup Beats Zacks Estimates.
- FoxBusiness/Dow Jones Newswires:
EARNINGS PREVIEW:US Investment Banks To Be Hit By Drop In Trading Activity
- Bloomberg Business Week:
Goldman Sachs Has First Quarter With No Trading Loss (Update2).
- Securities and Exchange Commission:
- Barron's Online Investor Soapbox:
Morgan Stanley Seen Taking Earnings Hit: Sandler O'Neill sees a $700 million debt-valuation adjustment loss.
Morgan Stanley Smith Barney 3Q Results Flat: Citi.