May 27 (Bloomberg) -- Lehman Brothers Holdings Inc., Morgan Stanley and Goldman Sachs Group Inc. had their second-quarter profit estimates cut by Bank of America Corp. and Sanford C. Bernstein analysts on the risk of further asset writedowns.

Bank of America's Michael Hecht lowered his estimate for Lehman to a loss of 50 cents a share from a previous prediction of 76 cents in earnings. Morgan Stanley was reduced to 95 cents from $1.40, and Goldman was trimmed to $3.45 a share from $3.75. For all three of the New York-based banks, the fiscal second quarter ends this week.

Lehman, the largest underwriter of mortgage bonds before the subprime market collapsed, has lagged behind Wall Street rivals this year as it tries to shed unwanted assets and convince investors that writedowns taken so far fully reflect the decreased value of the firm's holdings. The largest U.S. investment banks may be overstating their net assets by about 20 percent because of the way they've booked hard-to-value stakes for which market prices are scarce, the Bank of America report said.

``We believe this will continue to be a key reason why investors continue to stay on the sidelines'' when it comes to investing in brokers and that they will ``at least not dive head first into the group for reasons like `the group looks cheap' or has `bottomed-out' from a valuation perspective,'' Hecht wrote.

Lehman rose $1.09, or 3 percent, to $37.20 in New York Stock Exchange composite trading. Goldman climbed $1.28, or 0.7 percent, to $173.92, and Morgan Stanley advanced 41 cents, or 1 percent, to $42.24.

HSBC's U.S. Losses

Potential losses from the U.S. market aren't limited to U.S. banks. HSBC Holdings Plc, Europe's biggest bank by market value, may post more losses at its U.S. home-loan business, Chief Executive Officer Michael Geoghegan told shareholders in Hong Kong today.

``I believe we have further losses to make,'' Geoghegan said. ``We are not convinced yet the worst is over.''

Bernstein's Brad Hintz cut his estimate on Lehman to 15 cents a share from $1.38. He reduced Goldman to $3.25 from $3.70 and Morgan Stanley to $1.05 from $1.38. He rates Morgan Stanley ``outperform'' and Lehman and Goldman ``market perform.''

``We do not think the brokerage stocks are out of the woods concerning their current exposure to CDOs, mortgages and commercial real estate,'' Hintz wrote today. Mortgage-market woes ``are proving to be deep-rooted and long-lived.''

Surprises

Lehman and Goldman have exceeded analysts' estimates in each of the last four quarters, according to data compiled by Bloomberg. Morgan Stanley missed analysts' estimates in two of the quarters.

Four analysts have switched their earnings expectations for Lehman to a loss in the second quarter after the firm said hedges used to offset declines in the value of mortgage assets didn't work well. At least nine analysts have reduced their profit estimates for Goldman and Morgan Stanley this month.

``It is hard to imagine it will get much worse, but things aren't going to get so much better,'' Oppenheimer & Co. analyst Meredith Whitney said today in an interview with Bloomberg Television. ``You have a revenue scenario that has not rebounded at the pace any of the CEOs or I would like.''

As a group, large investment banks are trading at 1.43 times book value, compared with a five-year average of 1.96 times, the Bank of America report said. When adjusting their price-to-book ratio for ``a growing amount of illiquid assets on the balance sheets,'' their price relative to the value of their assets rises to 1.78 times, the analysts said. This suggests that the banks have ``not likely bottomed yet from a valuation perspective,'' the analysts said.

``I believe the financial crisis is over, but that's because we've inflated our way out of it and by inflating our way out of it we've created a bigger problem than the financial crisis,'' Richard Bove, an analyst at Ladenburg Thalmann & Co., said in an interview today.

To contact the reporters on this story: Niklas Magnusson in Stockholm at nmagnusson1@bloomberg.net; Josh Fineman in New York at jfineman@bloomberg.net.

Last Updated: May 27, 2008 16:47 EDT