Big Bank Q4 Outlook: KBW Slashes Estimates on Goldman, Morgan Stanley, State Street

• Goldman Sachs Group Inc GS shares are down 8 percent YTD, Morgan Stanley MS shares have lost 18 percent, and Citigroup Inc C are down 4 percent.
• Keefe, Bruyette & Woods’ Brian Kleinhanzl maintained Market Perform ratings on Goldman Sachs and Morgan Stanley, and an Outperform rating on Citigroup.
• The earnings estimates had been updated to reflect 4Q market activity, Kleinhanzl stated.

“The quarter was marked by pockets of elevated volatility and general uneasiness regarding worsening credit conditions,” analyst Brian Kleinhanzl wrote. The estimates for Goldman Sachs and Morgan Stanley have been reduced, while those for Citigroup have been raised.

“Given the expected weak ending to 2015, we are expecting more companies in our coverage to announce strategic actions aimed at improving returns with fourth quarter earnings,” Kleinhanzl commented.

The analyst expects total trading revenues to register a sequential decline of 11.5 percent, on average, for the three companies. He mentioned that the 4Q15 estimates for Goldman Sachs and Morgan Stanley had been reduced to reflect that trading and banking revenues could be softer than was previously expected.

In the report Keefe, Bruyette & Woods noted, “We are expecting more reorganizations and right-sizing in 2016 among Universal Bank stocks—driven by our expectations for weak trading revenues and the potential for higher capital requirements within Comprehensive Capital Analysis and Review (CCAR).”

The 4Q15 EPS estimate for Goldman Sachs has been reduced from $5.05 to $3.45 and that for Morgan Stanley has been lowered from $0.50 to $0.39. The 2015 EPS estimate for Goldman Sachs has been reduced from $15.40 to $13.81 and that for Morgan Stanley has been lowered from $2.49 to $2.38.

The EPS estimates for 4Q15 and 2015 for Citigroup have been raised from $0.98 to $1.05 and from $5.25 to $5.32, respectively.

“Overall, we are expecting a challenging revenue environment for fourth quarter earnings but we believe that the stock prices of the stocks in our coverage partially reflect these challenges already,” Kleinhanzl wrote.

The price targets for Goldman Sachs, Morgan Stanley and Citigroup have been maintained at $205, $37 and $62, respectively.