More write-downs loom at banks

Jul 14, 2008 @ 3:28 pm

By Aaron Elstein

It’s a foregone conclusion that Merrill Lynch & Co. and Citigroup Inc. will post enormous losses yet again when they report second-quarter results later this week.

Even JPMorgan Chase & Co., which has avoided the worst of the mortgage crisis, is expected to post a 60% drop in profits, according to Crain's New York Business.

As bruised and bloodied as these three banks are, more difficulties lie ahead.

“There is still tons of junk on banks' balance sheets, and no one knows just how bad it is,” said Graham Summers, chief executive of GPS Capital Research.

Mr. Summers has gained enormously this year from shorting the entire financial sector, and he remains bearish.

“After a roughly 20-year rally in financial stocks, we're in the midst of a major correction, and it isn't going to be over after just a few months,” he said.

Financial institutions, which have suffered ghastly hits from their exposure to subprime mortgages, bond insurers and leveraged loans, now face more pain because of the slowing economy.

Analysts warn that the slowdown will lead to losses connected to home equity loans, credit cards and auto loans.

Meanwhile, such lucrative Wall Street businesses as taking companies public and advising on mergers remain all but dead.

The outlook is arguably bleakest at Citigroup, which has been battered by more than $40 billion in mortgage-related losses — with more to come.

When the bank reports its results Friday, Oppenheimer & Co. analyst Meredith Whitney forecasts that Citi will write down another $12.2 billion in mortgages and other assets, and post a loss of $1.25 a share, its third straight quarterly loss.

Though Ms. Whitney expects Citi to return to the black next year, she cut her 2009 earnings estimate earlier this month to 45 cents a share from 80 cents.

The company said last week that it would sell its German retail banking business for $7.7 billion. Investors can expect more such sales and an additional dividend cut—Citi reduced its payout by 40% in January.

Asset sales also loom at Merrill, which is expected to report its fourth consecutive quarterly loss Thursday.

Analysts expect the firm to raise cash by parting with at least some of its stakes in money manager BlackRock Inc. and financial news and news and data provider Bloomberg LP.

Sanford C. Bernstein & Co. analyst Brad Hintz wrote in a client report last week that he doesn't expect the credit crisis to ease until at least early 2009 — meaning brokerage houses like Merrill will face more epic losses.

J.P. Morgan, which will also report Thursday, is in much better shape: its stock has fallen only about half as much as Merrill's or Citi's.

But storm clouds loom for the bank, even if they are mainly due to broad economic weakness rather than ill-advised gambles on subprime instruments.

Last week, Citi analyst Keith Horowitz cut his 2009 earnings forecast for J.P. Morgan by 22%, to $3 a share, on the likelihood of growing losses in its portfolios of consumer loans.


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