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Goldman and Morgan Stanley expected to suffer IPO earnings hit

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Via Financial Times

Earnings expectations for Morgan Stanley and Goldman Sachs have been sharply pared back ahead of this week’s results, after a torrid run of stock market listings and a slowdown in M&A activity weighed on investment banking performance.

Analysts surveyed by Bloomberg have slashed their third-quarter earnings estimates for Goldman by more than 15 per cent in the Past four weeks, while their forecasts for Morgan Stanley have come down by almost 10 per cent.

Goldman’s revision, which equates to a 25 per cent fall in year-on-year profits, partly reflected the loss the bank is likely to take on its stake in WeWork. The shared office provider had been targeting a $47bn valuation before its initial public offering imploded last month.

Goldman has not revealed the size of its stake in WeWork or the valuation method it uses, but Betsy Graseck, an analyst at Morgan Stanley, last week estimated the hit at $264m. Rival Jefferies has already taken a $146m writedown on its investment in the company.

Goldman is also among those on Wall Street facing writedowns on its remaining shares in Tradeweb, the bank-backed electronic marketplace operator that listed in April. Its share price fell 16 per cent in third quarter.

Jason Goldberg, banks analyst at Barclays, said investors “looked through” gains on Tradeweb across the banks at last quarter’s earnings season and would “likely look through it this quarter when it’s a drag”.

The tough IPO market has broader implications, especially for banks such as Goldman and Morgan Stanley, who rely on investment banking for a higher percentage of their earnings than universal banks such as JPMorgan Chase and Citigroup.

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“Investment banking is quite bad, and when you think of some of the high profile issues that we ran into in the primary markets this year in particular . . . that’s not going to improve appetite [for IPOs],” said Brennan Hawken, analyst at UBS.

M&A, another cornerstone of investment banking, is suffering from the slowest pace of global dealmaking for more than two years. Mr Hawken said one can “count on” lay-offs if recent investment banking trades “prove to be indicative directionally”.

Banks are already cutting jobs in some of their trading businesses, where third-quarter revenues are expected to be relatively steady year on year but remain well below their levels from a few years ago.

“We are at the top of the cycle in terms of revenues” in both investment banking and trading, said Charles Peabody of research firm Portales Partners. “You are finding that it is harder to get deals done because they are overpriced or had been inflated.”

JPMorgan, Goldman, Citi and Wells Fargo — who together account for more than 40 per cent of assets in the US banking system — will all report third-quarter earnings on Tuesday, with Bank of America and Morgan Stanley coming later in the week.

Analysts are expecting a 10 per cent year-over-year boost to earnings at Citibank, and smaller improvements at JPMorgan and BofA.

At the banks with big retail operations, in particular JPMorgan and BofA, investors will be looking for evidence that lending margins have stabilised. Falling interest rates resulted in both banks trimming their targets for interest income earlier this year.

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