The 'Perfect Storm' In U.S. Banks That Could Hurt Goldman And Morgan

Macquarie’s David Konrad expects 1Q16 to be “unusually weak” for US Universal Banks, due to concerns over global growth, declining oil prices and increasing use of negative rates around the world.

“These trends worked in concert to effectively shut down market activity in Jan and Feb and also placed pressure on asset managers (particularly hedge funds), causing many to de-lever,” analyst David Konrad commented. He added that the IPO markets are likely to be the weakest they have been in over five years, weighing on IB results.

“Moreover, elevated volatility, choppy valuations and increased use of electronic trading is expected to put pressure on trading results,” Konrad said.

2 Banks To Underperform Peers

The analyst expects Morgan Stanley MS and Goldman Sachs Group Inc GS to underperform peers in trading. All universal banks are expected to experience a tough quarter, with trading down approximately 15-20 percent y/y. However, Morgan Stanley and Goldman Sachs are likely to experience more challenges, “with trading results more comparable with the back half of 2015,” Konrad commented.

He noted three factors due to which Morgan Stanley and Goldman Sachs are likely to underperformance:

1. Client exposure geared toward asset managers rather than corporates, which creates more volatility in choppy markets.
2. Both typically have more exposure in FICC to credit and mortgage than typical macro products that have recently done better.
3. Morgan Stanley has commenced its restructuring efforts with FICC selling its physical oil businesses and exiting other non-core products, which has resulted in challenging y/y comps.

The 1Q16 estimates for Goldman Sachs has been reduced from $3.20 to $1.65 and for Morgan Stanley from $0.68 to $0.37, to reflect higher exposure to investment banking and trading. The price target for Goldman Sachs has been lowered from $190 to $180 and for Morgan Stanley from $32 to $31.