Goldman Profit Estimates Cut Again as Analysts Project 45% Drop

  • First-quarter EPS estimate sliced 94 cents over 4 weeks
  • Morgan Stanley, Citigroup also face downbeat revisions

Three months after predicting Goldman Sachs Group Inc. would put the tumultuous end of 2015 behind it and stabilize profits, analysts are reversing course and cutting projections. Again.

Twenty-two analysts have lopped 94 cents off the average estimate for Goldman Sachs’s adjusted earnings per share over the past four weeks -- the fourth straight quarter they’ve cut figures in the final days, according to data compiled by Bloomberg. This time, the 11th-hour reduction is among the largest for the firm since the financial crisis, with analysts now predicting its per-share profit will tumble 45 percent from a year earlier to $3.31 -- the steepest decline among major U.S. banks.

The sentiment shows a growing realization that Wall Street’s trading and investment-banking machine is sputtering amid broader global uncertainty that marred the start of the year. While firms have said markets improved in March, it wasn’t enough to make up for January and February, when price swings curbed stock and debt sales and curtailed client trades. Big U.S. banks start reporting earnings next week.

“People were holding out hope that March would get better and partially save the quarter,” Glenn Schorr, an analyst at Evercore ISI, said in an interview. “That didn’t happen. There’s no saving this quarter.”

More Exposed

Goldman Sachs, and to a lesser extent Morgan Stanley, is more exposed to the whims of the market than peers. What was once Wall Street’s most profitable securities firm generated two-thirds of its net revenue from trading and investment banking last year, and an additional 16 percent from investing and lending.

Estimates for banks less reliant on those businesses -- JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. -- haven’t changed more than 3 cents in the past four weeks, according to data compiled by Bloomberg. Citigroup Inc. and Morgan Stanley had adjustments more akin to Goldman’s, with analysts cutting the average estimate by 15 cents and 14 cents, respectively.

Investment banking is off to its worst start in a decade, Goldman Sachs’s own research analysts wrote in a March 30 report that discussed the good, the bad and the ugly aspects of the three-month period. Some senior executives at the New York-based bank are anticipating a drop of about 25 percent in revenue from that business, people with knowledge of the matter said in mid-March.

If the earnings land where analysts expect, it would be the bank’s worst first quarter since 2008, when profit amounted to $3.23 per share. That wouldn’t be the lowest over that time: The company reported a loss in the third quarter of 2011.

Michael DuVally, a spokesman for Goldman Sachs, declined to comment.

IPO Drought

About $14 billion of global initial public offerings were completed in the first quarter, a 67 percent plunge from a year earlier, data compiled by Bloomberg show. Sales of U.S. high-yield debt weren’t much better, tumbling 54 percent to $40 billion. In total, the Goldman Sachs analysts said, underwriting and advisory fees probably will decline 24 percent for the largest U.S. banks, not including their employer.

The recent 22 percent cut in Goldman Sachs’s estimated per-share profit, while a more severe swing than in at least two-thirds of the quarters since the start of 2009, isn’t the largest. In the second quarter of 2010, analysts sliced $1.99 -- or 50 percent -- off their estimate in the weeks before the firm reported results. Often, such changes go too deep, and Goldman Sachs beats the final estimate, as it has in 16 of the past 17 quarters.

While analysts adjust figures based on executives’ comments at investor conferences, Goldman Sachs’s leaders typically don’t provide public guidance. The bank’s staff does talk privately with analysts on topics including market conditions, and did so in recent weeks ahead of its April 19 earnings announcement, according to two people involved in the discussions who asked not to be identified to preserve relationships.

The changing perceptions about the bank’s first-quarter performance are notable because Goldman Sachs executives have been outspoken about the potential for a turnaround in bond trading, their commitment to the business and their plans to benefit when it does rebound. It has now become clear this won’t be the quarter when it does.

Market Swings

Morgan Stanley Chief Financial Officer Jonathan Pruzan said March 15 that market swings made it hard for firms to sell securities or consummate deals, and that rattled clients weren’t trading as much. Citigroup and JPMorgan also shared their views, saying trading and investment banking would suffer double-digit declines.

Markets rebounded in March, and junk-bond yields, which rose as high as 887 basis points above similarly dated Treasuries in February, fell to 705 basis points on March 31, about the same as where they began the year, according to data compiled by Bloomberg. U.S. investment-grade bond sales increased over the prior year.

That’s not enough for Christopher Wheeler, an analyst at Atlantic Equities LLP, who cut his Goldman Sachs estimates March 22 to $1.74 a share, a 67 percent drop. James Mitchell of Buckingham Research Group lowered his estimate by 51 percent, according to data compiled by Bloomberg.

By the time Goldman Sachs and Morgan Stanley publish earnings, more analysts will have weighed in, potentially leading to more estimate changes.

“I’ve covered the group for 17 years,” Evercore ISI’s Schorr said. “Unfortunately it’s super volatile and will move with client activity levels.”

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