September 22, 2011 / 2:06 PM / 8 years ago

Banks, brokers plunge as Twist reality sinks in

NEW YORK (Reuters) - Shares in Citigroup, Morgan Stanley and other big banks fell to their lowest levels in more than two-and-a-half years over growing concerns about their profitability in a deteriorating global economy.

Wednesday’s bleak economic outlook from the Federal Reserve, combined with its plan to lower long-term interest rates, raised fears that banks and brokerages are at risk for a prolonged period of depressed earnings.

The Fed’s aim with Operation Twist is to make credit cheaper for consumers, thereby stimulating borrowing and the economy. The problem is that banks and brokerage firms generally borrow short-term and lend long-term, meaning that if Twist works they are squeezed.

“Nearly every line is being marked down from our prior forecasts, which were not particularly optimistic to begin with,” Barclays banking analyst Roger Freeman said in a note on Thursday.

In afternoon trading, Goldman Sachs shares fell 5.5 percent to $92.48, their lowest level in two-and-a-half years. On Wednesday the stock closed below $100 for the first time since March 2009.

Morgan Stanley shares were down 6.3 percent to $12.95, at one point touching their lowest level since December 2008. Since its mid-February peak, the stock has lost 59 percent of its value.

Goldman has fared a little bit better, but not much. The stock is down 13 percent in the last five sessions and down 44 percent from its mid-January peak.

Banks have been hammered in recent weeks by deepening fears about slowing markets. Barclays analysts said on Thursday they expect Goldman to report a third-quarter loss, the second in its history.

Broader markets sank as well, with the Dow down 373 points at mid-afternoon. Shares in Citi fell 7.1 percent to a March 2009 low, and J.P. Morgan Chase dropped 4.7 percent to an April 2009 low. Bank of America fell 5 percent and Wells Fargo dropped 2.7 percent.

IN THE LINE OF FIRE

Brokers may fare little better, analysts said. Many brokers are having to waive fees on mutual funds, given their limited returns, while others are also getting hurt by a squeeze on margin lending.

“Generally speaking, earnings growth for (brokers) is at risk to a prolonged, low-rate environment,” Bernstein Research analyst Brad Hintz said on Thursday.

Hintz singled out three names at risk — Charles Schwab, TD Ameritrade and LPL — and cut 2012 earnings estimates for all three by at least 10 percent.

Schwab shares fell 2 percent in afternoon trading, while TD Ameritrade fell 1.1 percent and LPL dipped 0.8 percent.

Banks and brokers are not the only ones that are going to suffer the effects of Twist. Insurance companies and pension funds are also in the line of fire.

Life insurers rely on strong rates of return to meet their long-term obligations, both to insurance customers and to retirees who rely on annuities for income. Some actuaries say insurers may have to rethink their business models if rates stay low for years.

The nation’s largest pension funds, already being battered by equity market weakness, will also be hurt by persistently low bond yields. The 100 largest pension plans already face an asset shortfall relative to obligations, which could get much worse in the next two years.

One brighter spot — or at least a less-dark spot — may be retail banks such as Bank of America and Wells Fargo, among others. Though they have lamented the low-interest-rate environment like everyone else, analysts say their profile puts them at somewhat less risk.

“Where banks live is the 2-to-5-year period. The margin isn’t driven primarily by the long end of the curve,” said Jefferson Harralson, bank analyst with Keefe, Bruyette & Woods.

But even so, Harralson said, “the overall rate environment is a really tough one right now, and if you layer Operation Twist on top of that, it becomes tough to make decent spreads.”

Reporting by Ben Berkowitz in New York; Additional reporting by Joe Rauch in Charlotte; Editing by John Wallace and Tim Dobbyn

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