Financial Giants Keep Downgrading Each Other
The embattled financial sector took another hit Tuesday as JPMorgan Chase and UBS cut their earnings forecasts for Merrill Lynch and said they expect the Wall Street firm to disclose more write-downs.
In turn, Merrill downgraded regional banks Bank of America , PNC Financial and SunTrust Banks, saying the bursting of the housing bubble will continue to hurt lending and home equity.
The sharply lowered earnings expectations for Merrill stood out, though, dashing whatever confidence had been restored last week after the Federal Reserve helped arrange for JPMorgan
to take over Bear Stearns , avoiding a systemic meltdown among banks.
"In our view, Merrill Lynch is overexposed to the credit markets, which have been challenging, especially in the areas where Merrill has been most active," JPMorgan analysts Kenneth Worthington and Funda Akarsu wrote in a note.
Merrill shares were down 2 percent to $47.27 near midday, and the banking sector was the biggest drag on the Dow Jones industrial average.
JPMorgan forecast Merrill would write down an additional $2.1 billion of subprime debt, leading to a loss in the first quarter.
Merrill had $24.4 billion of mortgage-related write-downs in 2007, among the most on Wall Street, according to a Reuters tally.
The earnings forecasts for Merrill and the increasingly negative views on banks are a reminder that the financial sector's troubles as a result of the crisis of confidence in lending markets are far from over, even after JPMorgan on Monday quintupled its offer for Bear Stearns to $10 a share.
Punk Ziegel analyst Richard Bove said the sweetened offer is quite risky for JPMorgan because of the potential losses at Bear.
"What is most disturbing about this deal is that it uses a great deal of Morgan capital to buy a company that is losing market share, in a series of businesses that are declining in size, with a top management team that is best described as sclerotic," Bove wrote in a note to clients.
JPMorgan cut its first-quarter forecast for Merrill to a loss of 68 cents a share from a profit of $1.05 a share. It cut its full-year view to $2.75 a share from $5.00.
UBS , citing more expected write-downs and a likely increase in reserves against monoline insurers, said it expects Merrill to post a first-quarter loss of $2.00 a share, compared with a
previous forecast for earnings of 59 cents a share.
It cut its full-year forecast to a profit of $1.10 a share from $3.60.
Merrill cut its rating on Bank of America and Suntrust to "sell" from "neutral," and it downgraded PNC to "neutral" from "buy."
"The downgrades reflect a weaker earnings outlook (for all three banks) and a recent rebound in their prices driven by Fed rate cutting and other central banking actions, which should
ease the pain, but will not preclude a deep and protracted credit cycle, in our view," Merrill research analyst Edward Najarian said in a note.
After the latest wave of downgrades, Merrill has no "buy" ratings in the bank sector.
Meanwhile, Goldman Sachs forecasts global credit losses stemming from the current market turmoil will reach $1.2 trillion, with Wall Street accounting for nearly 40 percent of the losses.
U.S. leveraged institutions, which include banks, brokers-dealers, hedge funds and government-sponsored enterprises, will suffer roughly $460 billion in credit losses after loan loss provisions, Goldman Sachs economists wrote in a research note released late Monday.
Losses from this group of players are crucial because they have led to a dramatic pullback in credit availability as they have pared lending to shore up their capital and preserve their
capital requirements, they said.
Goldman estimated $120 billion in write-offs have been reported by these leveraged institutions since the credit crunch began last summer.
"U.S. leveraged institutions have written off less than half of the losses associated with the bursting of the credit bubble," they said. "There is light at the end of the tunnel, but it is still rather dim."
Of the cumulative losses expected by these leveraged players, bad residential home loans will represent about half, while poor-performing commercial mortgages will represent 15 percent to 20 percent.
The rest of the losses will come from credit card loans, car loans, commercial and industrial lending and non-financial corporate bonds, Goldman economists said.
Facing more credit losses, leveraged institutions have raised about $100 billion in new capital from domestic and foreign investors and reduced dividend payouts. This amount is more than three-quarters of the write-offs to date, the report said.