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Wall Street banks’ 3Q results in the spotlight
With markets continuing to feel the effects of the credit squeeze, all eyes were on Wall Street banks last week, who kicked off the 3Q results reporting season.
Goldman Sachs shrugged off a USD 1.5bn hit on non-investment grade loans to report a 79% jump in profit to USD 2.85bbn for the period. Its strategy of buying and selling companies offset the credit market turmoil in the third quarter, with the US firm realising a USD 900m gain on the sale of Horizon Wind Energy LLC in July. The group also reported a healthy return on average common shareholders' equity of 31.6% for the three-month period.
At the other end of the spectrum was Bear Sterns, which - as the Wall Street bank with the most exposure to fixed income and least to international markets - was hit the hardest. The securities firm reported a 61% drop in third-quarter net income to USD 171m - its biggest fall in profit in a decade.
Revenue fell 38% to USD 1.33bn in the third quarter, and the US firm was forced to close two hedge funds due to mortgage-related losses, costing the firm about USD 200m in the quarter. The company also saw return on equity drop to 5.3% from 16% a year earlier.
Also reporting this week were Morgan Stanley and Lehman Brothers, which both felt the effects of the credit squeeze, reporting USD 877m and USD 700m, respectively, in write downs on non-investment grade loans.
Lehman Brothers, the first of the four banks to report this week, surprised the market by reporting a less-than-expected decline of 3% in net income to USD 887m, as increased fees from equities trading and investment banking offset some of the losses from subprime home loans.
Fixed Income Capital Markets reported net revenues of USD 1.1bn, a decrease of 47% from USD 2.0bn in the third quarter of fiscal 2006, primarily due to lower performances within Credit and Securitized Products. Within Fixed Income Capital Markets, Lehman recorded very substantial valuation reductions, most significantly on leveraged loan commitments and residential mortgage-related positions. However, Equity Capital Markets reported its second-highest net revenue quarter, with net revenues of USD 1.4bn, an increase of 64% from USD 837m in the third quarter of 2006.
Morgan Stanley brought markets back down to earth, reporting third-quarter earnings that fell short of expectations. Profit from continuing operations fell 7% to USD 1.47bn on loans for leveraged buyouts and a decline in fixed income trading revenue. It was the first time in at least six quarters that the firm failed to beat analysts' expectations.
Fixed income sales and trading net revenues fell 3% to USD 2.2bn from last year, on the back of significantly lower credit revenue and a decline in commodities. The bank reported record results in derivatives and prime brokerage and record trading volumes in the bank's core equity business, however, these were offset slightly by significant trading losses in quantitative strategies of about USD 480m, while other sales and trading included losses of approximately USD 940m due to the marking to market of loans as well as closed and pipeline commitments. The group's return on average common equity fell to 17.2% in the third quarter, from 23.3% in the previous year.
With markets continuing to feel the effects of the credit squeeze, all eyes were on Wall Street banks last week, who kicked off the 3Q results reporting season.
Goldman Sachs shrugged off a USD 1.5bn hit on non-investment grade loans to report a 79% jump in profit to USD 2.85bbn for the period. Its strategy of buying and selling companies offset the credit market turmoil in the third quarter, with the US firm realising a USD 900m gain on the sale of Horizon Wind Energy LLC in July. The group also reported a healthy return on average common shareholders' equity of 31.6% for the three-month period.
At the other end of the spectrum was Bear Sterns, which - as the Wall Street bank with the most exposure to fixed income and least to international markets - was hit the hardest. The securities firm reported a 61% drop in third-quarter net income to USD 171m - its biggest fall in profit in a decade.
Revenue fell 38% to USD 1.33bn in the third quarter, and the US firm was forced to close two hedge funds due to mortgage-related losses, costing the firm about USD 200m in the quarter. The company also saw return on equity drop to 5.3% from 16% a year earlier.
Also reporting this week were Morgan Stanley and Lehman Brothers, which both felt the effects of the credit squeeze, reporting USD 877m and USD 700m, respectively, in write downs on non-investment grade loans.
Lehman Brothers, the first of the four banks to report this week, surprised the market by reporting a less-than-expected decline of 3% in net income to USD 887m, as increased fees from equities trading and investment banking offset some of the losses from subprime home loans.
Fixed Income Capital Markets reported net revenues of USD 1.1bn, a decrease of 47% from USD 2.0bn in the third quarter of fiscal 2006, primarily due to lower performances within Credit and Securitized Products. Within Fixed Income Capital Markets, Lehman recorded very substantial valuation reductions, most significantly on leveraged loan commitments and residential mortgage-related positions. However, Equity Capital Markets reported its second-highest net revenue quarter, with net revenues of USD 1.4bn, an increase of 64% from USD 837m in the third quarter of 2006.
Morgan Stanley brought markets back down to earth, reporting third-quarter earnings that fell short of expectations. Profit from continuing operations fell 7% to USD 1.47bn on loans for leveraged buyouts and a decline in fixed income trading revenue. It was the first time in at least six quarters that the firm failed to beat analysts' expectations.
Fixed income sales and trading net revenues fell 3% to USD 2.2bn from last year, on the back of significantly lower credit revenue and a decline in commodities. The bank reported record results in derivatives and prime brokerage and record trading volumes in the bank's core equity business, however, these were offset slightly by significant trading losses in quantitative strategies of about USD 480m, while other sales and trading included losses of approximately USD 940m due to the marking to market of loans as well as closed and pipeline commitments. The group's return on average common equity fell to 17.2% in the third quarter, from 23.3% in the previous year.