Analysts see another tough quarter for investment banks

New York: Wall Street research analysts are projecting yet another tough quarter for US investment banks marked by additional writedowns across a series of fixed-income assets amid an already weak operating environment.

Citigroup analyst Prashant Bhatia widened his third-quarter loss estimate for Lehman Brothers Holdings. Bhatia and Lehman Brothers analyst Roger Freeman also cut their third-quarter earnings estimates for Goldman Sachs Group and Morgan Stanley.

"We are lowering our third-quarter estimates to reflect the difficult operating environment, characterised by lower client-related trading volumes and losses on hard-to-sell assets," Bhatia said.

Bhatia expects Lehman to take fresh asset-related writedowns of $2.9 billion. He expects $1.8 billion in writedowns at Goldman and $1.7 billion at Morgan Stanley.

"Based on further deterioration in several indices, we expect further writedowns, primarily related to mortgage assets," Bhatia wrote in an August 20 note to clients.

Lehman analyst Roger Freeman said writedowns for this quarter would come from exposures to prime residential mortgages, subprime mortgages and securities, Alt-A residential mortgages and securities, collateralised debt obligations, and leveraged loans.

Depreciation

Commercial mortgages have also experienced price depreciation this quarter, as measured by widening commercial mortgage-backed securities spreads and a decline in the CMBX index, which tracks commercial-mortgage-backed securities, Freeman said. These declines have accelerated in the past couple of weeks, he said.

Freeman cut his third-quarter earnings estimates for Goldman to $1.70 a share from $3.77, and for Morgan Stanley to 75 cents a share from $1.13.

A second round of estimate cuts is most likely with Goldman's earnings and this will cause shares of the largest US securities firm to be at the "greatest risk" through the end of the quarter, Freeman said.

Freeman rates Goldman and Morgan Stanley "equal-weight".

Bhatia cut his earnings estimates for Goldman to $2.50 a share from $4.50, and for Morgan Stanley to 75 cents a share from 76 cents.

He widened his third-quarter loss view for Lehman to $3.25 a share from 41 cents a share.

Analysts including Merrill Lynch's Guy Moszkowski, Fox-Pitt's David Trone and Bernstein's Brad Hintz have also cut their outlook for Goldman and Morgan Stanley, and forecast a third-quarter loss at Lehman, this month.

Based on further deterioration in several indices, we expect further writedowns, primarily related to mortgage assets."

Prashant Bhatia

Citigroup analyst