Citi Downgrades Major Banks… Is It Downgrading Itself? (C, BAC, JPM, GS, MS)

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Major banks and brokerage firms do not cover their own banks, for obvious reasons of conflicts of interest.  They do, however, cover their peers and rivals.  Many investors believe that the banks are in effect issuing upgrades and downgrades on their own companies when they issue blanket research calls on the money-center banks or bulge-bracket brokerage firms.  So what about a sector cut on earnings of the major banks and brokerages from Citigroup, Inc. (NYSE: C)?

Citi has cut the earnings expectations considerable for the U.S. banking sector.  The Bloomberg headline gave it a 45% cut on average.  What is almost counter-intuitive is that the report actually raises estimates for rival Bank of America Corporation (NYSE: BAC) because of the gains from the stake sale of China Construction Bank.  It now expects $0.61 EPS from a prior $0.18 EPS target.  That is a net figure of course because that is a one-time gain.   Thomson Reuters has consensus earnings estimates of $0.21 EPS.

J.P. Morgan Chase & Co. (NYSE: JPM) is not immune from this call even if it is the most sturdy of all major banks.  The report cut the earnings estimates to $1/17 EPS from $1.26 EPS, but the Thomson Reuters consensus was $1.21 EPS before this call.

The huge hit was on Goldman Sachs Group Inc. (NYSE: GS).  Citi took estimates down from $2.70 EPS to ‘ten-cents’ (per Bloomberg) but it is worth noting that consensus from Thomson Reuters was $2.35 EPS before the effects of this call.

Morgan Stanley (NYSE: MS) saw estimates lowered to $0.25 EPS for the current quarter, down from $0.36 EPS.  Thomson Reuters had a consensus before this call of $0.47 EPS.

The real issue this morning is the weakness in Europe and the ongoing banking and sovereign debt fears.  The myriad of lawsuits and regulatory smack-downs in the United States are both in the backseat of this trading session.  BofA is down 2% at $6.82; Citi is down 2% at $26.20; J.P. Morgan is down 1.8% at $31.50; Goldman Sachs is down 1.5% at $100.75; and Morgan Stanley is down 2.3% at $14.93.

JON C. OGG