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Earnings: Investors take fright at banks’ weak third quarter

Analysts cut earnings estimates on early warnings from Jefferies and Deutsche; Revivals in M&A and DCM offer rays of hope

When US brokerage Jefferies reported weak third-quarter 2010 sales and trading revenues last month and Deutsche Bank warned in the prospectus for its rights issue that its corporate banking and securities division might report profits substantially below the comparable quarter in 2009, the markets took fright.

US financial stocks sold off sharply at the end of September, after Jefferies reported both fixed-income and equity trading revenue well down on the second quarter of 2010 and the third quarter of 2009. Deutsche’s analysts cut third-quarter earnings a share estimate for Goldman Sachs from $3 to $1.95 and for Morgan Stanley from $0.50 to $0.15, reading a 25% decline in equity trading volumes and weak performance across FICC.

Rich Handler, chairman and chief executive of Jefferies, suggested that the usual summer slowdown had been exacerbated by continued concerns about the global economy. "This caused investors and traders to pause, thereby reducing secondary trading volumes and opportunities for client-focused sales and trading businesses." Deutsche notes the same investor nervousness and unwillingness to commit "in the absence of clear market direction". Aside from trading, it says "origination and advisory revenues were also proving weaker in July and August 2010".