US: Credit Market

Merrill Could Take Big Subprime Charge, Analyst Says


Merrill Lynch's subprime mortgage unit, First Franklin Financial, could cut about $100 million from the brokerage's third-quarter profit on an impairment charge, a Wall Street analyst said Tuesday.

Merrill Lynch declined to comment on the report from Sandler O'Neill analyst Jeff Harte.

San Jose, Calif.-based First Franklin has become the No. 3 U.S. subprime mortgage lender since Merrill Lynch bought the company in December for $1.3 billion. First Franklin originated $11.3 billion in subprime loans through the first half of the year, behind industry leader Countrywide Financial's $13.6 billion and the $12.3 billion of HSBC Holdings affiliate HSBC Finance, according to National Mortgage News data.

But like its competitors, First Franklin has cut jobs and closed branches this year as defaults and foreclosures on loans to borrowers with weak credit have escalated throughout the industry.

Filings with U.S. banking regulators also show First Franklin has lost money this year. Merrill Lynch executives said last year they expected the acquisition to add to earnings, but that outlook has soured amid a meltdown in the subprime industry.

Merrill Lynch declines to specify the cuts, but current and former First Franklin employees estimate that several hundred jobs have been eliminated this year.

Harte lowered his third-quarter earnings-per-share estimate for Merrill to $1.56 from $1.93. Analysts on average look for the world's largest brokerage to earn $1.82 a share, according to Reuters Estimates.

Harte's estimate includes a $375 million benefit for the company from widening credit spreads on structured notes issued by Merrill. He also expects about a $100 million intangible asset impairment at First Franklin.

Merrill Lynch also is carrying about $1 billion in goodwill on its books from the First Franklin deal. Harte does not expect a goodwill write-down on the subprime assets. But others do, after seeing Lehman Brothers and Morgan Stanley take goodwill-related write-downs on their subprime operations.