Wall Street banks hit by downgrades

Goldman Sachs, JPMorgan Chase and Morgan Stanley were hit by a raft of analysts’ downgrades on Tuesday amid growing concerns that tough conditions in credit and equity markets will significantly reduce their profits.

The bearish comments by Wall Street analysts triggered a sell-off in banking shares that dragged the broader market lower, with the S&P 500 off 1.2 per cent.

Goldman’s shares fell 6 per cent after three analysts warned that the firm – which has outperformed rivals throughout the crisis – was experiencing a severe slowdown in its equity and investment banking businesses.

Shares in JPMorgan Chase dropped nearly 10 per cent – its biggest daily fall in six years – a day after it revealed that difficult credit markets had caused $1.5bn in writedowns in July.

Richard Bove, an analyst at Ladenburg Thalmann, lowered its earnings estimates for JPMorgan and warned that the company’s model of combining consumer and investment banking “is not working”.

Morgan Stanley fell more than 6 per cent after Mike Mayo, a Deutsche Bank analyst, cuts its estimates, while Wachovia fell more than 12 per cent after Tuesday’s warning of a larger-than-expected second quarter loss.

The three downgrades of Goldman set the gloomy tone in the morning, sparking investors’ concerns that the credit crunch was finally taking its toll on one of the banks least affected by the turmoil.

Investors who have spoken to Goldman recently say management struck a bearish tone, warning that the third quarter had proved challenging. But some analysts and bankers say Goldman’s management is often pessimistic and the firm has knack for beating earnings expectations. Goldman reports earnings for the quarter ending in August on September 16.

Meredith Whitney, an Oppenheimer analyst who met Goldman executives a fortnight ago, cut estimates for third quarter earnings nearly 40 per cent to $2.15 per share. “The primary drivers for these revisions are customer volumes, overall weak global equity markets and weak advisory and underwriting revenues.”

Mr Mayo also cut his estimates. The downturn in equity markets activity and a slowdown in European economies was hitting Goldman hard, he said.

“Recent weakness in terms of equity underwriting, equities trading and private equity – or equities in general – is hitting Goldman at its core strength,” he wrote. “The result is likely to be weaker-than-expected earnings which…should show that Goldman is not immune to capital market pressures.”

Mr Bove said Goldman’s business had “dried up”. He added: “At the moment the light at the end of the tunnel is very dim.”

By Francesco Guerrera in New York
Last updated: August 13 2008 00:04

Source: Financial Times

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