Goldman Sachs Reports 2nd Loss in its History

Oct. 19, 2011 — -- intro:

Just after the Occupy Wall Street protests celebrated its one-month anniversary, third quarter earnings season continued with Morgan Stanley, which reported net income for the third quarter rose to $3.77 billion.

It is unclear how the Volcker rule, which proposes to ban banks with insured deposits from "high-risk," short-term trading with its own funds, will affect banks' financial results. David Hilder, analyst with Susquehanna International Group, said Goldman Sachs and Morgan Stanley may exit the banking business if compliance regulations of the Volcker rule are implemented. The rule is expected to be implemented next year.

Hilder said those two banks are less dependent on deposits as a source of funding than other banks.

"Once the Volcker Rule implementation regulations are final, we would expect both [Goldman Sachs and Morgan Stanley] to examine the feasibility, as well as benefits and costs, of exiting the banking system," he wrote in a research note on Tuesday. "We would also expect to see more capital attracted to market-makers who are already outside the banking system."

S&P Capital IQ provided sales data as of June 30 for some of the major banks that will report third quarter earnings this month.

quicklist: category: Sales: $38.2 billiontitle: Morgan Stanley (MS)media: 14009153text:

Morgan Stanley reported profit of $2.2 billion for the third quarter on Wednesday, in part from an accounting gain, beating analysts' expectations, compared to profit of $131 million a year ago.

Morgan Stanley's investment banking business had $864 million in revenue, down 14 percent from a year ago.

Its wealth management made pretax income of $362 million, an increase from $281 million a year ago. Shares of Morgan Stanley were up about 2.9 percent to $17.11 at 9:18 a.m. EST.

FBR Capital Markets analyst Steve Stelmach wrote that Morgan Stanley's "diversified businesses" make it less exposed to the "prevailing regulatory headwinds," namely Basel III in Europe and the Dodd-Frank Act in the U.S.

Stalmach wrote in a report on July 22 that the company should benefit from a number of factors, including "an eventual rebound in retail client activity" and the potential for market share gain within its institutional business.

Morgan Stanley's Global Wealth Management business "remains the company's strongest lever to an improving market," according to Stalmach.

Its wealth management business ended the second quarter with $1.7 trillion under management, and net new assets for the period were $2.9 billion.

David Hilder, analyst with Susquehanna International Group, said Goldman Sachs and Morgan Stanley may exit the banking business due to added regulation from the Volcker Rule.

In September 2008, Morgan Stanley and Goldman Sachs became bank holding companies, a designation by the Federal Reserve which in part allows it to receive money from the government.

"For [Goldman Sachs and Morgan Stanley], which are less dependent on deposits as a source of funding, an exit from the banking system could make sense, depending on the costs of the new compliance systems," Hidler wrote. "An exit from the banking system would also presumably mean lack of routine access to the Fed's discount window, which [Morgan Stanley] used during late 2008 in significant volume."

quicklist: category: Sales: $44.3 billiontitle: Goldman Sachs Group (GS)media: 14723909text:

Goldman Sachs reported its second loss since its IPO in May 1999, missing estimates for the second consecutive quarter. The company reported a loss of $393 million in the third quarter on Tuesday compared with a $1.9 billion profit one year ago. Worries in both debt and equity markets caused softness in the bank's revenue, according to a note from Jody Lurie of Janney Capital Markets.

"Until events in Europe calm down, revenues from capital markets-oriented businesses are apt to remain soft," Lurie wrote.

Goldman has increasingly turned to trading for its profits and that business tanked in the third quarter.

Many analysts expected the venerated investment bank to take a third-quarter loss. But the loss was worse than expected at 84 cents a share, compared with the 11-cent loss expected by analysts. The firm's shares declined sharply in pre-market trading Tuesday.

Richard Staite, analyst with Atlantic Equities, said he expected Goldman Sachs' third-quarter results would be weak, likely reporting losses "at the underlying level due to very poor trading environment." That includes clients who have had to withdraw from the market and companies that have postponed IPOs and equity and debt issuance.

"And all of that is compounded by fact that they will have taken losses in principal losses on investments on their own balance sheets," Staite said.

Keith Horowitz, analyst with Citigroup, said he expected Goldman Sachs to report its second quarterly loss in its 12 year history as a public company. Horowitz wrote in a report that the expected loss would spark negative headlines, but the "weakness from this quarter" is generally already priced into the company's stock price.

The company's shares opened up on Tuesday morning 3 percent to $99.78.

quicklist: category: Sales: $127.5 billiontitle: Bank of America Corp. (BAC)media: 14616424text:

Bank of America was overtaken by JP Morgan Chase as the biggest bank in the country with $2.29 trillion in deposits versus $2.22 trillion for BofA at the end of the third quarter. Bank of America reported net income of $5.9 billion and a $6.23 billion profit in the third quarter, compared to a loss of $7.3 billion one year ago, which was in part due to an over $10 billion accounting charge. But its most recent gains were mostly due to the sale of assets and an accounting change for its debt.

The company's shares were up about 4 percent to $6.29 after the markets opened.

Staite, analyst with Atlantic Equities, said Bank of America's mix of businesses is similar to that of JP Morgan Chase, including retail, wealth management and investment banking. But Bank of America continues to be weighed down by bigger losses from their mortgage businesses, related to the acquisition of Countrywide.

Staite said Bank of America has "a much weaker capital position" than JP Morgan.

The economy is the bank's "chief risk," according to a research note from Keefe, Bruyette & Woods earlier this month. Its business is "consumer-laden" and therefore affected by the unemployment rate, which has stagnated to 9.1 percent.

The bank reported net income at 57 cents a share. Keefe, Bruyette & Woods expected Bank of America to report a third-quarter operating profit of 18 cents per share, which was 7 cents below consensus at 25 cents per share. Still, the third-quarter profit was expected to be a major improvement over last quarter's loss of almost $1 per share.

Bank of America's decision to sell its stake in healthcare provider HCA Holdings last month is part of the bank's plan to exit non-core businesses, including the private equity business, because of the Volcker rule, according to a note by JP Morgan analyst Vivek Juneja on Sept. 16.

During the company's earnings conference call on Tuesday, executives will likely address the $5 debit card fee rollout planned for next year.

While consumers have largely frowned on the imminent debit card fee, investors have cheered the move. Keefe, Bruyette & Woods raised its estimates for Bank of America's 2012 and 2013 earnings per share by 5 cents each to $1.32 and $1.71, respectively, due to the fee.

quicklist: category: Sales: $104.1 billiontitle: Citigroup Inc. (C) media: 13854181text:

Citigroup on Monday reported net income for the third quarter rose to $3.77 billion, or $1.23 a share, from $2.17 billion, or 72 cents, in a year earlier. But the bank had a $1.9 billion accounting gain, which offset lower trading and investment-banking revenue.

Citigroup shares, which had tumbled 40 percent this year, rose 21 cents to $28.60 in morning trading Monday.

Given Citigroup's global franchise and presence in emerging markets, it is subject to geopolitical and economic risk outside of the U.S., according to a JP Morgan report by Vivek Juneja on Tuesday.

Juneja listed other downside risks including regulatory risk, risks from government interference, interest rate risk, higher credit losses, and a significant deterioration in its credit risk profile.

But Citigroup's shares are trading below its tangible book value, according to Juneja. Citigroup has "strong capital levels, sizeable amount of loan loss reserves and potential for faster growth from emerging markets," according to Juneja.

"Citi also has better revenue growth drivers led by its emerging markets business and should benefit from slowing, albeit still high, credit losses, and continued shrinkage of Citi Holdings," Juneja wrote.

quicklist: category: Sales: $90.5 billiontitle: Wells Fargo & Co. (WFC)media: 13943692text:

Wells Fargo, the fourth-biggest U.S. bank and the nation's largest mortgage lender, said Monday profit rose 22 percent to a record $4.06 billion, or 72 cents a share, from $3.34 billion, or 60 cents, a year earlier. Revenue fell to $19.6 billion from $20.4 billion in the second quarter. The shares fell $1.60 to $25.05 on the news in trading Monday morning.

"We can't change the economic environment, yet we have worked hard to control the variables we can," CEO John Stumpf said in a statement. "The economic recovery has been more sluggish and uneven than anyone anticipated."

FBR Capital Markets analyst Paul Miller said Wells Fargo's "strong deposit franchise, diverse business lines, and solid mortgage origination platform" give the bank strong positioning. The bank's "low-cost, core-heavy deposit base and branch network provides "cheap and stable funding," Miller wrote on Aug. 9

Miller wrote that the company's lack of exposure to the global economy, "coupled with its best-in-class deposit franchise, shelters it from wider market turmoil, making it an attractive holding relative to peers in a volatile market."

FBR Capital Markets upgraded its investment rating on shares of Wells Fargo to "outperform" from "market perform," maintained its $31 price target. FBR also added Wells Fargo to FBR's Top Picks list, removing PNC Financial Services.

quicklist: category: Sales: $115.8 billiontitle: JP Morgan Chase & Co. (JPM)media: 14438467text:

JPMorgan Chase reported Oct. 13 that third-quarter profit fell 4 percent to $4.26 billion, or $1.02 a share, from $4.42 billion, or $1.01, a year earlier. The bank was the most profitable in the US last year, so its earnings are considered a barometer for the industry, which received a massive government bailout during the financial crisis that began in 2008.

"All things considered, we believe the firm's returns were reasonable given the current environment," Chief Executive Jamie Dimon said in a statement.

Paul Miller, analyst with FBR Capital Markets, said JP Morgan's results show the extent to which banks are struggling in terms of activity.

"It could have been much worse and it wasn't," he said, saying the bank had a "ho hum" and "relatively average" third quarter.

JP Morgan's shares were down 2.6 percent after the market opened to $32.33. He said optimistic investors will interpret the results positively while pessimistic investors will see negative results.

JP Morgan's results are used as a barometer for broader economic activity, given its size and global revenues, according to investment bank Keefe, Bruyette & Woods.