Thursday, December 16, 2010

Goldman (NYSE:GS), Morgan Stanley (NYSE:MS) EPS Estimates Cut by Nomura

EPS estimates on Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) were cut by Nomura, citing limited comp flexibility and sluggish FICC.

Nomura said, "FICC Trends Less Robust Versus Expectations - While investment banking and equity trading have fared reasonably well so far in 4Q10, we think FICC trends have been mixed at best, with some headaches in rates and credit. While there has been a pick-up in rate volatility, we think the sharp rate moves in the US have likely caused investors to pull back on activity. At the same time, we think competition has picked up in the rates business as some investment banks (like Morgan Stanley) are adding talent, which has likely compressed bid/ask spreads. Meanwhile, concerns around European sovereign risk and muni risk in the US have been a drag on the credit business. Finally, we think FX (better for the universal banks) and commodities have fared reasonably well in 4Q10. While capital markets activity hasn’t picked up as much as expected in 4Q10, we think trends will improve in 2011.

"Most Firms Will Have Less Comp Flexibility This Year (Even GS) - We think most firms will have less flexibility than in past years given lower revenues, increased headcounts in the capital markets businesses, increased regulatory scrutiny (did you see the CEBS guidelines?), and the added fact that a larger chunk of 2010 GAAP comp expense consists of deferred compensation from previous years.

"We are Trimming Our 4Q10 Estimates for GS & MS - We cut our 4Q10 estimates for GS and MS, though we left our estimates for Citi (NYSE:C), BofA (NYSE:BAC), and JPMorgan (NYSE:JPM) unchanged (we are below consensus on BAC and JPM) as they have other levers (like potential reserve releases) that could offset these headwinds. Our GS 4Q10 estimate goes to $3.75 from $4.25 given expected sluggish FICC revenues (credit & rates averaged 54% of FICC from 2007-2009), limited comp flexibility given a 9% rise in headcount, and a write-down of $300mm related to the firm’s Designated Market Maker business (highlighted in its 10-Q). For MS, our 4Q10 estimate goes to $0.30 from $0.40 as the firm is still in rebuild mode in FICC, and having low market share in a sluggish environment is not a good combination."

Goldman closed Wednesday at $165.21, down $2.12, or 1.27 percent. Morgan Stanley closed at $26.20, down $0.43, or 1.61 percent.

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