October 17, 2008 / 2:13 PM / 10 years ago

UPDATE 1-Wachovia cuts profit views on Goldman, Morgan Stanley

(Adds details, share movement)

Oct 17 (Reuters) - Wachovia Capital Markets lowered its 2008 and 2009 earnings estimates for Goldman Sachs Group Inc (GS.N) and Morgan Stanley (MS.N) to reflect recent capital raises and much softer earnings expectations.

Both the companies are to receive $10 billion each under the U.S. Treasury’s bailout plan, which should go a long way into improving sentiment around their long-term viability, analyst Douglas Sipkin wrote in a note to clients.

“The injections likely remove going concern risk and appear quite favorable from a capital standpoint,” he said.

U.S. officials announced on Tuesday a plan to inject $250 billion capital by acquiring preferred stock and warrants to purchase significant stakes across a number of banks.

Under the plan, Goldman and Morgan will get the capital in exchange for senior preferred shares that pay a 5 percent annual dividend for five years.

The Treasury will also get $1.5 billion in warrants from both firms, Sipkin said.

If the warrants were exercised at current prices, existing shareholders for Goldman Sachs would be diluted by about 3 percent and for Morgan Stanley by about 6.5 percent, he said.

Over-the-counter derivative trading is certainly on the decline as is the level of hedge fund assets, private equity assets, and general risk taking, the analyst added.

“The hope is that profitability returns to vanilla businesses such as equity and bond trading, banking, and asset management,” Sipkin said.

But given the speed of change, it’s difficult to forecast earnings for both firms, he said.

“Prime brokerage, which has almost become a liability for both GS and MS, is likely scaled dramatically,” Sipkin said.

Sipkin cut his 2008 earnings per share estimates on Goldman to $9.86 from $13.84, and on Morgan Stanley to $2.87 from $4.89.

For 2009, the earnings per share view on Goldman was reduced to $9.76 from $17.05, while that on Morgan Stanley was cut to $2.22 from $4.89.

Goldman shares pared initial losses and were up 51 cents at $112.91, while Morgan Stanley shares were down 2 percent at $18.34 in morning trade on the New York Stock Exchange. (Reporting by Amiteshwar Singh in Bangalore; Editing by Gopakumar Warrier)

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