Wall Street firms seen posting record first-quarter revenue
NEW YORK (Reuters) - The biggest U.S. investment banks are expected to post record first-quarter revenue, defying analysts who caution the good times may stop rolling and warn their high-flying stocks are increasingly at risk of losing steam.
Starting next week, Goldman Sachs Group Inc. (GS), Lehman Brothers Holdings Inc. (LEH), Bear Stearns Cos. (BSC) and Morgan Stanley (MS) combined are expected to report a revenue increase of about 12 percent.
Still the three months that ended February 28, seasonally the best quarter of the year, should continue a remarkable streak of strong results due to another surprisingly good trading environment and a boom in mergers and acquisitions.
"Stronger than expected trading and investment banking trends, not to mention seasonal trends," prompted Banc of America Securities analyst Michael Hecht to boost his estimates this week. "A rising tide lifts all boats."
According to Reuters Estimates, Goldman's quarterly earnings are expected to rise 11 percent from a year ago to $3.26, Lehman EPS is seen up 8 percent to $3.14, and Bear Stearns earnings are expected to climb 11 percent to $2.94. Morgan Stanley profit is seen falling 5 percent to $1.22 a share after a charge.
Quarterly results will again be driven by fixed-income trading. The segment has defied skeptics, who for several years have predicted that rising rates would lead to a slowdown. Instead, global client activity has remained robust thanks in part to strong new debt issuance and changes in interest rate spreads.
Underwriting and M&A fees jumped 30 percent, analysts estimated. Quarterly M&A volumes rose 52 percent to $737 billion, the best in four years, according to Dealogic.
Morgan Stanley also should benefit from improved retail brokerage activity, while a rising market boosts merchant banking gains at Goldman, Lehman and Bear Stearns. Goldman's $4.1 billion stake in Sumitomo Mitsui Financial Group and other principal investments will boost revenue by $330 million.
FLYING TOO HIGH?
The positive news has not been lost on investors, who have bid up brokerage stocks to record highs for the past two years. The AMEX Broker-Dealer Index soared about 70 percent over the last two years and is up 11 percent this year.
Investment bank stocks currently fetch about 2.3 times book value, while the group's average price-to-book valuation over the past 15 years is 1.75 times. At those levels, the market implies it expects the banks to generate returns on equity of 25 percent in the coming year.
"Twenty five percent ROE is a 'nosebleedingly' high number for firms that have increased their capital employed by nearly 75 percent over the last three years," said Sanford Bernstein analyst Brad Hintz. Over the past decade, Wall Street firms, on average, generated ROE of 18 percent.
Analysts expect business to remain strong throughout 2006. The backlog of M&A and underwriting transactions continues to build, which means more fees to be realized in the second half.
Yet analysts say that with stocks at these levels, any bad news or change in sentiment could take the steam out of the sector's extended rally. Critics note that industry results tend to have wild swings and could face a headwind in the second half as central banks boost rates to stave off inflation.
Sandler, O'Neill & Partners analyst Jeff Harte, who rates the investment bank group as "hold," observed that investment banks rarely have moved consistently higher for 10 months straight.
"To have another significant move upward, we're going to need really good news" said Harte. "People keep saying trading can't get any better, and they've been wrong, but it's tough to see debt trading still being the earnings driver."
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03/08/2006 10:17 |
