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BANGALORE, June 24 (Reuters) - Citigroup and JMP Securities on Wednesday joined a group of analysts predicting a second-quarter loss at Morgan Stanley (MS.N), citing charges from repayment of government funds, but the analysts took comfort about the Wall Street firm’s long-term prospects.
On Tuesday, FBR Capital Markets had reversed its second-quarter earnings estimate for Morgan Stanley to a loss.
Citigroup analyst Keith Horowitz expects Morgan Stanley’s second-quarter results to be “messy,” and said the company’s $5 billion of gross commercial real estate equity exposure is a risk.
Morgan Stanley may post a “large loss” in the second quarter, weighed down by charges related to the repayment of government bailout funds, said Horowitz, who also forecast a 2009 loss for the company.
Banks are returning money taken from the $700 billion Troubled Asset Relief Program, which was once intended to spur lending but is now viewed as a sign that recipients are too weak to survive on their own.
In connection with the early repayment and associated dividends, several banks are taking second-quarter charges.
Goldman Sachs said it paid a dividend of $425 million, which will reduce second-quarter earnings by about 77 cents a share, while Morgan Stanley said it expects a $892 million charge in the second quarter related to the early repayment.
Horowitz forecast a second-quarter loss from continuing operations of 73 cents per share for the company, compared with his prior profit estimate of 50 cents.
JMP Securities expects Morgan Stanley to post a second-quarter loss of 58 cents a share compared with its earlier GAAP earnings view of 82 cents. FBR, which had earlier expected the company to earn 33 cents, now sees a loss of 30 cents.
The key driver of analysts’ second-quarter forecast revisions was Morgan Stanley’s early repayment of bailout money and debt valuation adjustments (DVA) on the narrowing of the company’s own debt spreads.
“We believe both are ‘good problems to have,’ which do not detract from core earnings power, which continues to increase on better-than-expected trading revenue, strong underwriting revenue, and higher equity market levels,” JMP Securities analyst Michael Hecht wrote in a research note.
Citigroup’s Horowitz expects Morgan’s increased appetite for risk taking, a likely bottoming out of its prime brokerage results, improved equity capital markets, and continued wide bid ask spreads on credit, foreign exchange and interest rate products will likely drive good performance.
Much of the overhang investors have been worried about for Morgan Stanley, such as DVA markdowns, will largely be eliminated after second-quarter results without an impact to book value given upside to core earnings power, JMP analyst Hecht said.
Citigroup’s Horowitz said he does not expect significant mark-to-market losses from Morgan Stanley’s exposures to subprime, leveraged loans, commercial mortgage-backed securities or private equity positions.
He also expects improved core performance across Morgan Stanley’s institutional and asset management businesses compared with the first quarter, due to a four-fold increase in equity capital markets underwriting volumes and better asset management performance.
Horowitz maintained his “hold” rating and price target of $28 on the stock. JMP’s Hecht kept his “market outperform” rating and $34 price target.
Morgan Stanley shares were up 23 cents at $27.93 Wednesday afternoon on the New York Stock Exchange. (Reporting by Brenton Cordeiro and Supantha Mukherjee in Bangalore; Editing by Deepak Kannan)