Oppenheimer Sees Huge Writedowns at Merrill, UBS


Merrill Lynch and UBS may lose money this quarter and suffer write-downs of $6 billion and $11.1 billion, respectively, as credit problems worsen, according to Oppenheimer analyst Meredith Whitney.

The analyst issued her forecasts late Wednesday, after bank shares tumbled following her decision a day earlier to slash estimates for Citigroup , Bank of America , JPMorgan Chase and Wachovia , the largest U.S. banks.

She said Citigroup's first-quarter write-down could total $13.12 billion and that write-downs in the sector could top $50 billion.

"Many expected the fourth quarter to be the 'kitchen sink' for the industry," Whitney wrote in a separate report dated Thursday. "First-quarter results (will) be a rude awakening."

In October, Whitney correctly predicted that Citigroup would cut its dividend and raise $30 billion of capital. She expects more banks to seek new capital, with Citigroup "most needing of the swiftest and largest capital raise."

Whitney now expects Merrill to lose $3 per share in the first quarter, and tripled her projected write-down from $2 billion. She had previously forecast a profit of 45 cents per share. The analyst also cut her 2008 profit-per-share forecast to 20 cents from $4.

Analysts on average expected profit per share of 17 cents and $3.82 for the respective periods, Reuters Estimates said.

Future of Financials

Whitney wrote that Merrill faces write-downs of $1.84 billion on collateralized debt obligations, $1.17 billion on below-prime "Alt-A" home loans, $950 million on leveraged loans to fund buyouts, $571 million on commercial mortgages and real estate, and $1.5 billion of other write-downs. (See Whitney interview at left.)

The analyst also wrote that it was unclear whether Chief Executive John Thain would try to raise more capital, perhaps through hybrid securities, after having raised $12.8 billion since December. She also said Merrill faces a "highly disruptive year" of reorganization and downsizing.

UBS, meanwhile, may suffer a first-quarter loss of $2.75 per share, Whitney wrote. She previously forecast a profit of 72 cents per share. The analyst cut her 2008 profit per share forecast to 45 cents from $3.70.

Whitney wrote that UBS faces write-downs of $6.86 billion on CDOs, $3.19 billion on Alt-A loans, $650 million on leveraged loans and $355 million on commercial real estate.

UBS has been the European bank hit hardest by the U.S. subprime mortgage crisis. It has reported about $18 billion of subprime-related losses, and estimated about $80 billion of remaining exposure to other investments that some analysts and investors consider risky.

Whitney gives both banks' shares an "underperform" rating.

She said Merrill trades at 1.5 times fourth-quarter book value and UBS at 1.6 times, levels she considers "relatively rich."

UBS shares rose 4.1 percent to 30.54 Swiss francs in midday trading Thursday in Europe. Merrill shares closed on Wednesday down 7.2 percent at $44.42 on the New York Stock Exchange.