US economic slowdown likely to spread to Wall St

WASHINGTON (AP) – Sluggish economic growth this summer is hurting the unemployed, homeowners and regular investors. That pain will likely spread to Wall Street later this month when banks release their second-quarter financial results.

As investors withdraw from a wavering stock market and business activity slows, top-tier investment banks are making less money from fees they charge for trading and wealth management. Revenue from merger and acquisition deals also is leveling off.

For investment banks such as Goldman Sachs and Morgan Stanley, only one major income-driver remains strong, an analyst said Thursday: fees from sectors such as underwriting offerings of stock or debt.

Lower expectations for overall economic growth led Bernstein Research analyst Brad Hintz to reduce his per-share earnings estimates for those two banks in 2011 and 2012. For the current quarter, he expects Goldman to earn less than half of his previous estimate.

“We had expected that by mid-year 2011, the major brokers would have been in the sweet spot of their earnings cycle. . . . But the drawn out weakness in US housing, Eurozone fears and growing concern about Asian growth has negatively impacted market conditions,” Hintz said in a research note Thursday. “The second quarter trading is simply the story of weak volumes and directionless markets.”

Hintz affirmed “outperform” ratings on Goldman and Morgan Stanley, saying their stocks are undervalued because stock traders have overreacted to bad economic data and fears about the impact of new rules that will limit certain bank activities and reduce their profitability. He maintained his one-year price targets of $205 for Goldman and $35 for Morgan Stanley. Both targets are about 50 percent higher than the stocks’ closing prices on Thursday.

Investors are worried about a rule that would increase the amount of money banks must stockpile in case their investments and loans lose value. The more cash banks hold, the less they can lend. Income from borrowers’ interest payments will decrease. Goldman and Morgan Stanley also will be hurt more than most by a ban on proprietary trading – the practice of investing solely to generate profits for the bank.

The new rules mean that big banks will rely more heavily on fees from capital markets activities such as trading, Hintz said. He said the most successful banks will be those that trim staff and invest in faster, more efficient trading technologies.

Better technology will allow banks to gain market share, while cost-cutting will allow them to profit in spite of costly new rules, he said.

As they capture more of the market, “the big trading houses will get bigger,” while banks with smaller capital markets businesses “will be squeezed out of the market,” Hintz said.

Hintz made these adjustments to his earnings projections for Goldman:

• For the second quarter ended June 30, he reduced his earnings projection to $2.05 per share from $4.85 per share. Analysts surveyed by FactSet expect earnings of $2.68.

• For the third quarter ending September 30, he dropped his estimate to $3.44 per share from $5.35 per share.

• For the years 2011 and 2012, he expects Goldman to earn $11 per share and $17.72 per share, respectively. His earlier estimates were $15.82 and $21.20.

His new projections for Morgan Stanley:

• For the second quarter ended June 30, he expects that the bank will lose 54 cents per share. He estimated earlier that it would earn 43 cents per share. Analysts surveyed by FactSet expect earnings of 46 cents per share.

• For the third quarter ending Sept. 30, he expects earnings of 37 cents per share, up from a projected loss of 48 cents per share.

• For the years 2011 and 2012, Hintz expects Morgan Stanley to earn 99 cents per share and $2.51 per share, respectively. His prior projection was for earnings of $1.15 and $3.18.

Bernstein Research’s projections are lower than those of most Wall Street analysts, according to FactSet data.

Goldman Sachs will release its financial results for the second quarter on July 19. Morgan Stanley releases earnings on July 20.

Shares of Goldman Sachs Group Inc. rose $1.12 to close at $135.01 Thursday. Shares of Morgan Stanley rose 27 cents to $23.