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Nov 8 (Reuters) - CIBC World Markets, Citigroup and Banc of America cut their price target on Morgan Stanley (MS.N) after the U.S. investment bank said it expects fourth-quarter earnings to be reduced by about $2.5 billion from a write-down on its U.S. subprime exposure.
Shares of Morgan Stanley were up 4.1 percent to $53.25 in early electronic trade.
Despite the price target cuts, all three brokerages maintained their top ratings on the firm that had said revenue for the two months ended Oct. 31 was reduced by $3.7 billion due to the write-down.
Morgan Stanley’s write-downs are unique as they appear to be trading-related rather than underwriting-related, said CIBC analyst Meredith Whitney, who rates the stock “sector outperformer.”
Whitney cut her fourth-quarter earnings view for the company and lowered her prior fixed income, currency and commodities trading revenue view by about $3 billion to reflect the company’s pre-announced write-down, while noting that the firm sees solid results from other areas of its business outside of fixed income.
Whitney cut her target on the stock to $78 from $88, while Citi analyst Prashant Bhatia cut his target by $3 to $85.
“While market conditions remain tough and illiquidity persists in the collateralized debt obligation marketplace, we now have a much better understanding of maximum loss exposure, which in our view, is very manageable,” Bhatia wrote in a note titled “New Disclosure Trumps Fear (Selling Way Overdone).”
Banc of America analyst Michael Hecht agreed with Bhatia, saying Morgan Stanley’s net balance sheet exposure to subprime related securities of $6 billion is small compared with that of Citigroup Inc’s (C.N) $55 billion, UBS’s UBSN.VX (UBS.N) $39 billion and Merrill Lynch & Co Inc’s MER.N $21 billion.
“Relative to other pure-play investment banks, we think Morgan Stanley may have one of the brightest return on equity trajectories from here, given its lower reliance on fixed income sales and trading versus peers,” Hecht said.
BofA’s Hecht and Citi’s Bhatia rate the stock a “buy.” Hecht cut his price target on the stock to $79 from $92.
On Wednesday, Morgan Stanley became the latest firm, among a growing list of financial companies that include Citigroup Inc (C.N) and Merrill Lynch & Co Inc MER.N, to report large write-downs related to exposure to subprime, or lower-quality loans.
In October, the bank said it would cut several hundred jobs in its residential mortgage business and combine its three U.S. mortgage businesses under a single platform to be based in Irving, Texas. This move marked a retreat by the company that had expanded its mortgage business since 2005.
A meltdown in U.S. subprime mortgages this year sparked a broader credit crunch, leading to a sharp slowdown in asset backed securities, leveraged finance and other related business.
Morgan Stanley’s shares were up, after closing at $51.19 Wednesday on the New York Stock Exchange. (Reporting by Tenzin Pema in Bangalore; Editing by Bernard Orr)