UPDATE 2-BofA sees Q2 loss at Lehman, cuts EPS view for GS & MS

martes 27 de mayo de 2008 15:37 CEST

 (Adds details)
 May 27 (Reuters) - Banc of America forecast a
second-quarter loss for Lehman Brothers Holdings LEH.N and
cut its earnings outlook for Morgan Stanley (MS.N: Cotización) and Goldman
Sachs (GS.N: Cotización), and said brokers may continue to underperform in
the current challenged credit environment.
 Shares of Lehman fell more than 3 percent to $34.99 before
the bell, after closing at $36.11 Friday on the New York Stock
 "On top of weaker activity levels across many areas of
investment banking this quarter, this quarter 'basis risk' or
the divergence between cash and derivatives spreads is the
issue driving substantive mark-downs for the I-banks versus
spread widening," Banc of America analyst Michael Hecht said in
a research note to clients.
 Hecht said a slowing economic growth and large balance
sheet exposure to residential and commercial mortgages
suggested a lackluster, low-visibility environment for the
large investment banks through 2008.
 The rationale for larger markdowns this quarter is hedging
ineffectiveness, Hecht said, and added that Lehman, Goldman and
Morgan Stanley would likely see decent sized markdowns for the
 Brokers for several years had benefited from growth of
hedge funds as well as the expansion of the mortgage markets,
trends no longer fueling Wall Street earnings.
 In more recent months, pressures on the brokerage industry
have risen because of the economy, slowing investment banking
activity and, perhaps most importantly, more evidence of faulty
risk management.
 The analyst also said severance charges would weigh on
results for the investment banks.
 He, however, said he was neutral on the large investment
banks and preferred asset managers, given their positive
operating leverage to above-average organic growth and
positively trending equity markets.
 "While asset managers' valuations are above historical
norms by a wider gap than the brokers, we favor names with
accelerating growth prospects and potential to expand margins,"
Hecht said.
 The analyst said he expected Goldman to have the best
relative second-quarter results, while he forecast Lehman to
have the worst quarter.
 Hecht said Merrill Lynch & Co MER.N remained his top pick
among the large investment banks in the near-term due to the
stock's lower "basis risk" -- or the risk that the price of a
future will vary from the price of the underlying cash
instrument as the future's expiration date approaches -- versus
its peers.
 Following are the second-quarter and fiscal 2008 earnings
estimate changes, and the price target changes made by Hecht on
the banks:
 Name            Rating     Q2 EPS view     2008 EPS view   
Price target
                         New    Old      New     Old     
New    Old
 Goldman Sachs   Neutral    $3.45  $3.75    $15.14  $16.08  
$176   $185
 Lehman Brothers Neutral   -$0.50  $0.76    $2.30   $4.69   
$43    $50
 Morgan Stanley  Buy        $0.95  $1.40    $5.21   $5.99   
$57    $62
  Shares of Goldman were trading at $171.70 before the bell
after closing at $172.64 Friday, while that of Morgan Stanley
was trading at $41.20 after closing at $41.83 on Friday.
  (Reporting by Ramya Dilip in Bangalore; Editing by Jarshad