Friday, 31 August 2007

Lehman downgrades major brokers

Yesterday Lehman Bros. (LEH) joined Merrill Lynch (MER) in downgrading earnings for the major US brokers. From Bloomberg:

Goldman, Wall Street Firms' Estimates Cut by Lehman

Aug. 30 (Bloomberg) -- Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co. and Bear Stearns Cos. will have trouble boosting profit through next year because of the rout in global credit markets, according to Lehman Brothers Holdings Inc.

``Investors are discounting 1998-style declines in returns on equity this quarter and next,'' Roger Freeman, a Lehman analyst based in New York, said in a note to clients today. ``We admittedly have limited conviction about 2008 ourselves sitting here at the end of August with a wall of worry to climb between now and October.''

Analysts across Wall Street are forecasting less profit growth for the securities industry after fixed-income trading fueled three straight years of record earnings. Loans held in subprime-mortgage bonds are going bad at fastest rate in 10 years, eroding confidence in asset-backed securities and corporate credit and triggering a slide in stock prices.

Freeman cut his estimate for Bear Stearns's third-quarter earnings by more than half to $1.45 a share and predicted that profit will decline in the following three months and next year. He also said Goldman, Morgan Stanley and Merrill, the three largest U.S. securities firms, won't earn as much as he expected previously.
Click on the heading for the full article. This comes just two days after downgrades by Merrill Lynch. As noted previously with the general lack of disclosure it's difficult to know exactly how badly earnings will be affected. As the Lehman analyst says he has 'limited conviction' about the state of next years earnings as it is just too early to tell. Below are the analyst's downgrades, click on the chart for a sharper image:

As you can see Bear Stearns is suffering the biggest downgrades especially in the 3rd and 4th quarter this year, no doubt due to the blowup of two of their hedge funds.

Goldman, Morgan Stanley, Lehman and Bear Stearns all end their fiscal 3rd quarters at the end of August and are expected to report earnings the week of Sept. 17. Thus 3Q07 earnings for these companies will only reflect one month of the credit crunch. Two months, assuming the tight credit markets continue, will be factored into Merril Lynch's 3Q07 which closes at the end of September.

If tough credit conditions persist through to the end of the year 4Q07 earnings will be of more interest as they give a better indication of how well the brokers can weather the storm.