Monday, September 3, 2012

Bank Results Don’t Bode Well for Goldman and Morgan Stanley

So far this earnings season, banks appear to be posting very mixed reports, showing some loan growth but recording poor results in investment banking and trading. That split bodes poorly for Goldman Sachs (GS) and Morgan Stanley (MS), both of which depend heavily on trading and banking results to drive earnings.

To be sure, weakness in banking and trading is already factored into the stock prices — analysts have been lowering their earnings estimates on the two companies for weeks with that in mind. But recent results from JPMorgan Chase (JPM) and Citigroup (C) simply underscore that those areas were particularly weak in the fourth quarter. Wells Fargo (WFC), which derives most of its income from more traditional lending, posted the most promising fourth quarter earnings report.

The problem for Morgan Stanley and Goldman is that Citi’s trading and banking revenues appear to be even worse than anticipated, indicating that analysts may be underestimating weakness in those segments of the industry.

“Capital markets related revenues were under even more pressure than anticipated,” wrote Sandler O’Neill analyst Jeffrey Harte about Citi’s earnings report. “Core FICC revenues declined by 26% sequentially and core equity trading revenues declined by 17% sequentially, from a very low 3Q11 bar. Investment banking revenues declined by 13% sequentially driven by lower revenues across the board.”

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