Investors' Soapbox AM/Barron’s

 | THURSDAY, APRIL 8, 2010

Slowdown Touches Goldman, Morgan Stanley

Sandler O'Neill trimmed fist-quarter estimates on both banks.

Sandler O'Neill & Partners

INVESTMENT BANKING VOLUMES lagged in the first quarter. While the underwriting environment did improve during the historically strong month of March, the boost was not enough to offset the early quarter slowdown. Strong corporate-debt-origination levels were more than offset by a significant sequential decline in equity originations and completed merger and acquisition (M&A) volumes.

However, the investment banking outlook remains positive. While the first quarter was weak, we continue to believe that the early 2010 slowdown in completed transactions has been more a function of postponements than canceled transactions. For example, the industry equity-underwriting pipeline has increased 125% since the start of the year, and announced M&A notched a second consecutive quarterly increase during the first quarter.

The fixed-income trading environment has been a bright spot. While industry revenue should not retest the first quarter of 2009's record levels, we expect a significant sequential increase on the back of a broad-based sequential rebound in trading volumes, continued asset price appreciation, and resiliently wide bid-offer spreads.

For the first time in a long time, we do not expect debt valuation adjustments (DVAs) to have a material impact on peer-group revenue. This is especially positive for Morgan Stanley (ticker: MS) (rated at Buy) as the firm recognized approximately $5.2 billion of DVA-related losses in 2009.

We are reducing our first-quarter earnings-per-share estimates for Goldman Sachs (GS) (rated at Buy) and Morgan Stanley from $4.57 and 91 cents, respectively, to $4.33 and 72 cents, respectively. Our relative reduction is larger for Morgan Stanley than Goldman Sachs primarily due to business-mix issues.

The fixed-income trading environment has been a first-quarter bright spot, and Goldman Sachs has a much larger and more established fixed-income-trading franchise.

-- Jeff Harte
-- Ted Holzman