Wall Street downbeat on bank earnings

By Francesco Guerrera and Andrew Edgecliffe-Johnson in New York

Published: October 5 2010 23:03 | Last updated: October 5 2010 23:03

Wall Street’s sentiment towards Goldman Sachs and Morgan Stanley has turned sharply bearish over the past month with analysts’ estimates for the banks’ third-quarter earnings plunging amid a slump in trading activities.

The poor performance of the trading operations – a key driver of the two banks’ recovery after the financial crisis – will intensify questions over their business models and deepen fears of job

Analysts have slashed their forecasts for Morgan Stanley’s third-quarter results by more than 73 per cent in the past 30 days, according to Thomson Reuters’ StarMine.

Goldman’s consensus estimate has fallen by more than a ­quarter since early September and is now forecasting the lowest quarterly earnings per share, excluding exceptional items, since November 2008.

Sri Raman, StarMine’s quantitative analyst, said Goldman’s results, due on October 19, could still come in below the consensus numbers because five of the 22 analysts covering the bank were yet to lower their predictions.

“If they don’t all revise their estimates, we would expect Goldman to miss [the consensus forecast],” he said. “That is a bold prediction because Goldman has a history of always beating expectations.”

StarMine estimates that Goldman’s earnings could come in more than 16 per cent below the current EPS consensus of $2.52. In the same period last year, Goldman earned $5.25 per share.

The consensus estimate for Morgan Stanley is $0.15 per share, compared with the $0.38 EPS recorded in the third quarter of 2009.

Goldman and Morgan Stanley declined to comment, but executives said they expected most analysts to fall into line before the results. Financial sector analysts tend to move later than colleagues covering other sectors because bank earnings are more volatile.

Macroeconomic woes and political uncertainty have kept investors on the sidelines, prompting analysts to become more and more pessimistic during the quarter about the profitability of trading operations.

“Anxiety stemming from a waning economic recovery and uncertainty over the mid-term elections left clients paralysed and trading desks fell silent during the quarter,” wrote Brad Hintz of Bernstein’s Research in a recent note that lowered estimates for Morgan Stanley and Goldman Sachs.

StarMine weights analysts’ forecasts according to their past accuracy and gives more emphasis to those who make early calls or “bold” estimates, which differ strongly from the mean.

It estimates that its methodology has had an 80 per cent success rate over the past 10 years in predicting the direction in which estimates will move for highlighted stocks.

Mr Raman said this quarter’s reporting season should see earnings of North American companies rise on average by 23.8 per cent year on year, building on the 38 per cent growth seen in the second quarter.