By Liz Moyer and Brett Philbin
TAKING THE PULSE: After a mixed message delivered by Jefferies Group Inc. (JEF) last month, Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) are expected to turn out lackluster second-quarter earnings, with weaker trading results and a slowdown in investment banking transactions.
Global bond underwriting volume fell 18% from a year ago and 35% from the first quarter, while global equity underwriting activity tumbled 38% from a year earlier and 16% from the prior period, according to data provider Dealogic.
The steep drop-offs came despite supersized deals such as Facebook Inc.'s (FB) initial public offering--a market debut that was marred by technology glitches and criticism over the pricing of the stock. In a sign of the tough times, last month had the lowest equity capital markets activity of any June since 1995.
"Overall industry-wide investment banking activity retrenched further from already muted first quarter levels," said Credit Suisse analyst Howard Chen in a recent note to clients.
The European sovereign debt crisis and concerns about the global economy were the main culprits for the slump in client activity, as announced mergers in the quarter, some 9,876 transactions, were the lowest level since the third quarter 2009, according to Dealogic.
COMPANIES TO WATCH:
Goldman Sachs Group Inc. (GS) - reports July 17
Wall Street expectations: Analysts polled by Thomson Reuters expect Goldman to post earnings per share of $1.29 a share on revenue of $6.5 billion. In the second quarter last year, the company reported earnings per share of $1.85 on $7.3 billion in revenue.
Key issues: Like other large Wall Street banks, Goldman's businesses have been hit by lingering concerns over Europe's debt woes and lackluster demand for investment banking services in the U.S. Fixed-income trading, which has long been a key driver of Goldman's earnings, is expected to be down from the first quarter but up from last year's second quarter. Equity trading revenue could decline from both the first and the second quarter of last year.
Advisory and underwriting have been particularly muted, as corporations hold off on mergers and new issuance of stocks and bonds. Analysts are forecasting double-digit declines in second-quarter advisory revenue as well as equity underwriting. Despite that, Goldman participated in some of the quarter's biggest fee-generating transactions, including Facebook's market debut and $3 billion in financing for Chesapeake Energy Corp. (CHK).
The firm's portfolio of public and private investments has been another issue for Goldman in recent quarters. Investing and lending, as Goldman reports it, could be dragged down by losses on holdings of Industrial & Commercial Bank of China Ltd. (1398.HK). ICBC shares are down 11% year-to-date, and analysts estimate Goldman's stake lost $225 million in the quarter. That could be offset by gains, including a $150 million estimate for Goldman's stake in Facebook, according to analysts at Evercore Partners Inc. (EVR), who lowered their second-quarter earnings forecast for Goldman on Monday to $1.39 from $1.87 per share.
Morgan Stanley (MS) - reports July 19
Wall Street Expectations: Analysts expect Morgan Stanley to report earnings of 41 cents a share, including gains related to its debt, on revenue of $7.8 billion. A year ago, Morgan Stanley posted a loss of 38 cents related to a $1.02 charge tied to the restructuring of a $9 billion investment from Mitsubishi UFJ Financial Group Inc. (8306.TO, MTU). Revenue in the year-ago period was $9.3 billion.
Key Issues: After a surprisingly strong first quarter, investors will be looking for signs of consistency from Morgan Stanley, a result that could be hard to come by given the expected pullback in client activity across the firm's trading and banking businesses. The firm, which has gained market share in bond trading over the past two years, is likely to post $1.3 billion in core fixed income trading revenue, down 9% from a year ago and 50% sequentially, according to Credit Suisse.
Morgan Stanley, more so than other big banks, will benefit from a large accounting gain related to the widening of its credit spreads during the period. In a sharp reversal from the prior quarter, the so-called debt valuation adjustment should boost the firm's revenue by $600 million to $700 million, analysts say.
Within wealth management, the focus will be on any comments from Chairman and Chief Executive James Gorman concerning negotiations with Citigroup Inc. (C) over the securities firm's plans to acquire an additional 14% stake in their Morgan Stanley Smith Barney brokerage joint venture. Morgan Stanley, which owns 51% of the venture, has the option to acquire Citi's stake in increments between 2012 and 2014.
Beyond an update on those talks, analysts will be looking for more color from management on the decline of integration costs related to the brokerage.
(The Thomson Reuters and year-earlier figures may not be comparable due to one-time items and other adjustments.)
Write to Liz Moyer at firstname.lastname@example.org and Brett Philbin at email@example.com