Bank analysts slash Goldman estimates hardest

By Lauren Tara LaCapra

NEW YORK (Reuters) - Analysts have been slashing earnings estimates for big Wall Street banks recently, particularly for Goldman Sachs, as unpredictable trading markets and weak merger and underwriting volumes hurt the sector's profit potential.

Third quarter average profit estimates for Goldman Sachs Group Inc <GS.N> have fallen 18 percent over the last month to $2.28 per share, according to Thomson Reuters I/B/E/S. Average estimates for Bank of America Corp <BAC.N> have fallen 8 percent, and average forecasts for JPMorgan Chase & Co <JPM.N> have fallen 4 percent.

Goldman has fallen particularly hard because it has a greater dependence on traditional investment banking businesses like buying and selling securities, underwriting stock and bond offerings, and advising on mergers.

The largest U.S. investment bank has derived 45 percent of its revenue from the once-lucrative business of fixed income, currency and commodities trading, on average, since the start of 2006.

JPMorgan, in contrast, derived just 12 percent of its revenue from bond trading.

Trading was particularly difficult in the third quarter because even though clients traded more in a volatile market, much of the activity came from low-margin products, like Treasury bonds and equities. Analysts also warn that some banks may have to take steep write-downs on inventories of stocks and bonds whose values declined.

On Sunday, Citigroup analyst Keith Horowitz cut his third-quarter earnings estimate for Goldman to just 10 cents, down from a previous estimate of $2.70, although 36 cents of that came from one-time items. Horowitz cut his Goldman outlook as part of his broader reduction in price targets for major banks.

Horowitz's move follows Oppenheimer & Co analyst Chris Kotowski changing his recommendation on Goldman shares to "perform" from "outperform" on Tuesday. Both he and Nomura analyst Glenn Schorr also cut Goldman estimates dramatically.

Full-year average estimates for Goldman Sachs have dropped 8 percent and 3 percent for 2011 and 2012, respectively, according to Thomson Reuters I/B/E/S.

"Brokers like Goldman, I just want to stay away from them right now because I feel like they are so tied to the market," said Todd Kaplan, a value-stock investor at Rand Strategic Partners in Westborough, Massachusetts, who manages about $10 million in assets and owns Bank of America but not Goldman.


Even outside of trading, Goldman could turn in a disappointing quarter.

Goldman's investing and lending business may also get hit hard because of declines in the value of the stocks and bonds that Goldman owns. Its holdings in Industrial And Commercial Bank of China Ltd <601398.SS> have declined more than 15 percent so far this quarter, which could result in a $475 million write-down, according to Citi's Horowitz.

Nomura's Schorr anticipates a $700 million negative revenue from the overall investing and lending division.

Analysts also lowered assumptions for its investment banking revenue because companies have been hesitant to pull the trigger on IPOs, debt offerings and M&A transactions due to high volatility and weak pricing.

Most analysts have remained generally bullish on Goldman despite what may soon be the sixth straight quarter of weaker profit and revenue. Of the 28 analysts who cover the stock, 18 recommend buying more, while 6 suggest clients hold onto positions without adding and only two recommend selling.

But even fans of the stock have gotten more cautious about how much it might rise. The median price target for Goldman is $155, down from $170 a month ago and $198 three months ago.

New targets still represent a big premium to Goldman's recent market value. Its stock is down 39 percent this year, setting a new 52-week low of $99.80 on Monday. It has traded at a discount to tangible book value since August, reflecting investors' belief that, without more trading activity, the cost of capital for Goldman's huge trading business may cut deeply into earnings.

That said, shares of Morgan Stanley, Bank of America and Citigroup <C.N> have posted sharper declines than Goldman Sachs so far this year. That is why some stock analysts are less enthusiastic about Goldman Sachs. They believe stocks that have fallen further may have more potential upside.

"If a client called us up to ask if he/she should buy the stock we would suggest at least seven other names that we would suggest buying first," said Oppenheimer's Kotowski.

(Reporting by Lauren Tara LaCapra; Editing by Tim Dobbyn)