New Reasons to Love Goldman Sachs and Morgan Stanley
.
By Aaron Lucchetti/WSJ / Oct 6, 2010
As financial firms prep a likely ugly round of third-quarter earnings reports, you have to dig under a lot of rocks to find a bullish take on banks.
And then there’s the latest from Glenn Schorr. The veteran bank analyst, who joined Nomura Securities last month from UBS, said in a report today that Goldman Sachs and Morgan Stanley “have taken considerable steps to improve their balance sheets and are well positioned to handle coming increased capital/regulatory requirements.”
Schorr, who had “buy” ratings on both Morgan and Goldman when he left UBS in June, recommends in his new report that investors buy Goldman shares. His rating on Morgan is “neutral.”
The new Nomura analyst also opened with ”buy” ratings on J.P. Morgan and Citigroup, while giving a neutral rating on Bank of America.
Schorr said in an interview that it’s been several years since he recommended Citigroup, a business he says is now “over the hump” in getting through its bad news. He says he particularly likes Citi’s international businesses.
Schorr’s report may come as a welcome relief to big banks, which begin reporting earnings next week. There are growing fears that increasing regulation and shriveling trading volumes will pinch banks’ profits in the third quarter and beyond.
On Goldman and Morgan, Schorr acknowledged the companies face tougher regulation that forces them out of some lucrative businesses. But he says that with the stocks trading relatively cheap in recent months, Goldman and the industry in general will bounce back.
“People overlook that these are flexible, dynamic businesses that won’t just sit there as punching bags and take it on the chin,” Schorr said. “They’ve never faced anything like this, but they will adapt, overcome and improvise… If there are illiquid assets that become bad-return businesses” due to increased capital requirements “they will exit.”
Schorr’s $175 target price for Goldman is 16% above the New York firm’s closing price Wednesday of $150.84. His $27.75 target price on Morgan Stanley was about 9% above its closing price today.
Morgan’s stock story “will take time to play out,” Schorr wrote. He notes that the company will likely face a sharp increase in its risk-weighted assets under new capital regulations and sluggish retail investor activity that could push out profitability growth for the company’s wealth management division.
Schorr also wrote that brokerage firms could cut compensation and speed up their trading with clients to help improve financial results. They’ll also reduce businesses that eat up a lot of balance sheet such as “correlation trading books,” Schorr wrote. “Firms that manage increased government/regulatory influence …. Will likely fare best.”
Universal banks like J.P. Morgan and Citigroup will be able to raise prices in certain businesses to offset higher regulatory costs, Schorr added. The big banks’ capital markets businesses and international units will also “provide some offset to sluggish domestic consumer and commercial banking revenues.” |
