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.
