BANGALORE Lehman Brothers Holdings Inc LEH.N may post a loss in the third quarter on likely pre-tax writedowns of $3.5 billion, while Goldman Sachs Group Inc (GS.N) may incur $1.5 billion in writedowns, according to an analyst at Morgan Stanley.
Analyst Patrick Pinschmidt also cut his third-quarter earnings outlook for Goldman to reflect broad-based market weakness, but expects the market to look past a disappointing quarter for the company if it found no evidence of a material breakdown in risk management.
Shares of Goldman, the largest U.S. securities firm, were down about 1 percent at $155.02 in afternoon trade on the New York Stock Exchange, while those of Lehman were up more than 8 percent at $15.22.
"While Goldman Sachs is less exposed to mortgage writedowns, industry-wide decline in flow business coupled with vulnerability to equity market directionality stemming from principal investment activities has exacerbated exceedingly difficult market backdrop," Pinschmidt said.
He cut his third-quarter earnings outlook on Goldman to $1.65 a share from $3, and forecast a third-quarter loss of $2.80 a share for Lehman. He earlier saw a profit of 8 cents a share for Lehman.
According to Reuters Estimates, analysts expect Goldman to earn $2.62 a share, while Lehman is seen posting a loss of $1.89 a share for the third quarter.
Wall Street research analysts have been projecting yet another tough quarter for U.S. investment banks marked by additional writedowns across a series of fixed-income assets amid an already weak operating environment.
Since the start of this month, analysts at least seven brokerages, including Merrill Lynch, Banc of America Securities and Bernstein, have cut their view for Goldman and Morgan Stanley (MS.N). At least four have forecast a quarterly loss for Lehman.
ASSETS IN QUESTION
Lehman, the fourth-largest U.S. investment bank, is expected to reduce about $15 billion of illiquid assets in the third quarter, but may need to reduce this by another $10 billion to $15 billion to allay fears over potential markdowns and the level of toxicity of its remaining illiquid portfolio, Pinschmidt said.
"We believe a key question for investors is not the size of the writedown, but how remaining illiquid asset exposure squares with capital cushion," he added.
Lehman, which is among the biggest dealers of mortgage-backed securities on Wall Street, has taken a $7 billion hit from credit-related writedowns and losses since the start of the global crisis.
"For the franchise and shares to turn the corner, we think management needs to announce a significant bulk asset sale or framework for investors to evaluate the structure or pricing of likely asset disposals," Pinschmidt said.
The combination of an "exceptionally" weak macro-economic backdrop as well as widening credit spreads in the third quarter makes as asset sale even more urgent, he added.
"Barring an asset disposal to a third party in which Lehman contributes equity, we believe that a stake sale in conjunction with a partnership to manage assets may provide the best path forward," Pinschmidt said.
The bank, which has been seeking to assuage investors concerned about its $60 billion of mortgage assets, failed to sell a large stake to Asian investors, a newspaper reported last week.
According to Pinschmidt, a sale of Lehman's asset management business was not an attractive scenario, as the remaining business would need additional capital to offset the absence of a recurring high return on equity earnings stream from its Neuberger Berman business.
This would reduce Lehman's normalized return on equity outlook and increase earnings volatility for its remaining entity, he said.
Lehman has looked at selling at least a part of its asset management unit to private equity firms, and is looking at selling commercial real estate assets.
The analyst maintained his "overweight" rating on shares of Lehman and Goldman.
(Editing by Jarshad Kakkrakandy)