UPDATE 2-Oppenheimer: Brokers to underperform for more quarters

lunes 8 de septiembre de 2008 16:55 CEST

 (Recasts; adds details)
 Sept 8 (Reuters) - Oppenheimer's Meredith Whitney expects
at least four more quarters of pressured earnings at investment
banks until businesses are right sized, while they battle major
declines in revenue sources.
 "Up to now, brokers have been reluctant to pare back their
expense bases/headcount largely because they didn't view their
earnings exclusive of multi-billion dollar writedowns as all
that bad. This is about to change in our opinion," analyst
Whitney wrote.
 Wall Street banks, which have been roiled by billons of
dollars of writedowns, are expected to post weak third-quarter
earnings as trading volumes dip and M&A activity slows
 The group now faces "negative operating leverage as these
companies simply cannot cut expenses fast enough to offset
revenue declines," even as they continue to reel from falling
asset prices and industry wide de-leveraging, Whitney wrote in
a research note to clients.
 Since last summer, almost $2 trillion less liquidity has
flowed through the U.S. capital issuance markets versus the
same period year prior, Whitney said. August volumes were the
lowest since December 2001 and represented the twelfth month of
year-over-year declines in the past 13 months, she added.
 "The last time revenue and expenses were so mismatched was
during 2001/2002," Whitney said, adding that second quarter of
2008 was the first quarter when brokers uniformly experienced
negative operating leverage exclusive of writedowns.
 The analyst said in 2001/2002, "it took four/five quarters
for the brokers to downsize, (and) when they did, headcount
declined by over 15 percent for the biggest brokers."
 "Today, headcount is roughly 22 percent or 45,000 higher
than trough levels reached in 2003, which we also note marked
the point at which these stocks began to outperform again." she
 The slowdown in business today is far more pronounced and
protracted than it was in 2001/2002 and "this resize will be at
least equally painful," Whitney added.
 Whitney lowered her 2008 estimates for four large U.S.
investment banks -- Lehman, Merrill, Goldman Sachs and Morgan
Stanley -- citing higher writedowns, lower trading volumes,
weak global equity markets and lower advisory and underwriting
 Whitney expects Lehman Brothers LEH.N and Merrill Lynch &
Co MER.N to take a total writedown of $4 billion and $8.2
billion, respectively, in the third quarter, tied to
residential-mortgage and commercial-mortage related positions,
and leveraged finance exposures.
 The trading volumes for the equity markets and fixed income
were weak in the third quarter of 2008 and the major global
indices continue to be down more than 9 percent for the year,
she said.
 "As Goldman Sachs (GS.N: Cotización) revenues are relatively the most
equity-linked of its broker peers, the fact that broad global
equity market indices are all down double-digits will have a
meaningful effect on the company's earnings," Whitney wrote.
 The analyst maintained her third-quarter estimates for
Morgan Stanley (MS.N: Cotización), but lowered her estimates for Goldman
Sachs, Lehman and Merrill.
 The following table lists the estimate changes:
                   NEW     PRIOR     NEW       PRIOR     NEW
 Morgan Stanley    $0.81   $0.81     $4.20      $4.25   
$4.15    $4.40
 Goldman Sachs     $1.55   $2.15     $12.82     $14.32  
$14.00   $14.90
 Merrill Lynch    -$4.60  -$2.93    -$11.42    -$10.50  
$1.27    $1.27
 Lehman Brothers  -$2.70   $0.23    -$6.67     -$3.70   
$1.70    $1.80
 (Reporting by Ratul Ray Chaudhuri in Bangalore; Editing by
Himani Sarkar)