Equity underwriting doldrums to linger

Hard times aren’t over yet for The Goldman Sachs Group Inc. and Morgan Stanley, those erstwhile investment banking powers that recently converted to bank holding companies, according to a new report. The New York-based companies will have to wait another two years before their once-powerful equity underwriting franchises — among the highest-margin businesses on Wall Street — return to peak levels of profitability, said analysts at Sanford C. Bernstein & Co. LLC. As a result, the analysts, led by Brad Hintz, lowered their 2009 earnings-per-share expectations for both firms by 3% and their 2010 forecasts by 4% to 5%. Volume of initial public offerings — which typically reward underwriters with fees ranging from 3.25% to 7% of the amount raised — fell 45% in 2008 and are expected to fall another 25% this year and 10% in 2010, the analysts forecast. Secondary market offerings — which typically generate fees of 2% of the underwriting total — will likely fall 40% this year, the Bernstein analysts said, citing data from IHS Global InsightsInc. of Lexington, Mass. That market should begin growing at an 8% annual rate in 2011. Because Standard & Poor’s of New York recently lowered the firms’ credit ratings (to single-A- from AA- at Goldman and to single-A from A+ at Morgan Stanley), the Bernstein analysts also lowered their target prices to $105 from $150 for Goldman and to $28 from $50 for Morgan Stanley. Shares of Goldman closed Tuesday at $88.71 and were down more than 2% in Wednesday morning trading. Shares of Morgan Stanley ended Tuesday at $19.58 and were down 3.6% in late morning trading Wednesday. The Bernstein analysts maintained their rating for Goldman at “market perform,” equivalent to a neutral recommendation, and at “outperform,” or buy, for Morgan Stanley.