The warning from Citigroup that its quarterly earnings will drop 60% could be a sign of things to come from U.S. banks and brokerages.
AP
Citigroup Center
Citigroup blamed its troubles on $5.9 billion in losses and write-downs from subprime and leveraged loan difficulties, fixed income trading, and weakness in its consumer business.
The warning from the largest U.S. bank by market value came on the same day that Swiss bank UBS disclosed $3.4 billion in losses, driven by some of the same factors.
Also on Monday, UBS's chief domestic rival Credit Suisse Group said its third quarter results would be hurt by market turmoil as the credit crisis struck at the heart of the global financial industry.
Analysts said a number of other banks are likely to issue similar profit warnings.
"Years to Work Out"
"I believe there is a systemic debt problem and it will take years to work out -- and the Federal Reserve cannot resolve the issues," said Richard Bove, bank analyst at Punk Ziegel.
Asked where the next warning may come from, Bove said: "Clearly it is going to come from JPMorgan Chase, Bank of America and Merrill Lynch." Any one of those companies could
take "sizable write-offs related to their security portfolios," Bove added.
Monday's announcements are the latest from a lengthening queue of banks which have taken hits from a meltdown in U.S. subprime mortgages which has set off a global liquidity crisis.
Lending among banks worldwide has seized up as institutions try to gauge the extent of their exposure to subprime mortgages, which were packaged into asset-backed securities and
sold to investors around the world.
"We are going to see more preannouncements and bad news coming out from the (U.S.) banks as we near the quarterly announcement dates," said Brad Hintz, analyst at Sanford C.
Bernstein.
"As a general rule, we can look at 50 percent declines in fixed income revenues as a good rule of thumb for the industry at this point."
Three Big Factors
Bove of Punk Ziegel said three main factors will hurt profits.
He said the growth that came from selling debt securities will now slow down dramatically; hedge fund managers who had access to cheap money will now trade less frantically; and a
huge backlog of funding for leveraged buyouts will weigh on banks.
"So, these three huge drivers to earnings over the past four to five years have been muted, reduced, cut back," said Bove.
Meanwhile, the stocks of the three banks that warned on Monday -- Citi, UBS and Credit Suisse -- all rose after the news.
Financial markets appeared to greet the announcements with relief after weeks of uncertainty among many investors who have been trying to work out the exact exposure of the world's
largest banks to subprime.
In the weeks to come, analysts expect other big U.S. institutions to come clean and take it on the chin.