The U.S. credit crisis is easing and the risk in its housing market is dramatically lower now, but economic growth will remain under pressure over the next year, the chief executive of Merrill Lynch said.
U.S. investment banks, which have suffered massive subprime-related losses, are not likely to report such big losses in the coming quarters, although banks with a big exposure to consumers will see more pain, John Thain said on Wednesday.
"I believe the combination of falling home prices, rising food and energy prices and higher unemployment will result in a pull back on the part of the U.S. consumer, which will continue to exert a drag on the economy over the next 6-12 months," he said on a visit to the bank's India operations.
Dismal results on Tuesday from UBS , Lazard , Fannie Mae and Legg Mason suggest that the credit turmoil is far from over, with more write-downs, layoffs and losses expected in the months ahead.
Merrill posted a $2 billion first-quarter loss last month, its third consecutive quarterly loss, amid hemorrhaging in subprime mortgages, collateralised debt obligations and other risky investments.
It has recorded more than $30 billion of write-downs since the third quarter, and Thain has said they were planning for slower, more difficult next few quarters, although he was optimistic about fiscal year 2008.
"Investment banks are already doing a pretty good job of taking write-offs and raising capital and it's not likely that you will see any kinds of those losses going forward," he said.
"But banks that have a consumer exposure, like credit cards and home equity loans, are likely to experience greater delinquencies going forward than we've seen." NOT DECOUPLED Merrill is increasing business in emerging markets, shrinking its balance sheet and cutting costs to help offset losses.
It has also also raised billions of dollars, including from Singapore investment firm Temasek, but had no "present intention" to raise more capital, Thain said.
He said the bank was well capitalised and had a comfortable liquidity position and had improved its risk management structure -- which now reports directly to him -- and the compensation philosophy.
"We've significantly reduced the risk profile of our trading desks, and we've added to our senior personnel...
there is probably a few more people we need to add." Thain, a 24-year veteran of Goldman Sachs Group and the former head of NYSE Euronext has brought on board Nelson Chai, NYSE Euronext's chief financial officer, and Noel Donohoe from Goldman Sachs, as co-chief risk officer.
Thain has also hired Thomas Montag as the new global head of sales and trading, from Goldman Sachs, as part of his bid to attract new talent to turn around the world's largest brokerage.
"Now we can focus on our business and move forward," he said.
The Asia-Pacific region, particularly India and China, held many exciting opportunities, he said, although no market was completely immune to the U.S. slowdown.
The impact on India, however, will be mitigated by its large domestic demand, he said.
"India will be less affected and more immune to the slowdown, and it will continue to grow at an attractive rate," he said.
"China is also very attractive to us, but China is more coupled to the U.S. and so is likely to be more affected."