Merrill May Write Down $5.4 Billion: Lehman

Merrill Lynch will likely incur $5.4 billion of write-downs in the second quarter, mainly from its exposure to monolines, said an analyst at Lehman Brothers, who also saw higher quarterly losses at the world's largest brokerage.

In addition, British bank Barclays may need to raise $18 billion more in capital. (See correction below.)

Lehman analyst Roger Freeman raised his write-down view by $3 billion for Merrill, making his estimate the highest among Wall Street analysts. Analysts have till date expected write-downs to range from $3.5 billion to $4.2 billion.

"We did a deeper review of Merrill's monoline exposures on non-ABS CDO (asset-backed security and collateralized debt obligation) assets... this incremental $1.7 billion of writedowns constitutes the majority of our adjustment," Freeman said.

In addition to the monoline write-down, the analyst said he was now incorporating a larger CDO/subprime write-down following a sharp decline in the ABX index over the past few days.

ABX, a synthetic index of home equity asset-backed securities tied to credit default swaps, is comprised of risky home loans.

Freeman widened his second-quarter loss estimate to $2.78 a share from 64 cents.

For 2008, he sees higher losses of $2.99 a share, from his prior view of a loss of 53 cents.

The analyst cut his price target to $44 from $47, and rates the stock "equal weight." Shares of Merrill closed at $33.05 Thursday on the New York Stock Exchange.

Through Thursday, they have plunged 38 percent this year.

Barclays May Need More Cash

Barclays may need to raise a further 9 billion pounds ($18 million) in capital, according to analysts at Citigroup, who also said the British bank could take further significant write-downs as credit market conditions continue to deteriorate.

Citigroup also said Barclays was more likely to cut its dividend than raise it, despite assurances from the bank that it would keep paying dividends in cash and that its annual payout would be in line with last year's 34 pence per share.

Barclays, Britain's third largest bank, said on Wednesday it raised 4.5 billion pounds from investors including Qatar and Japan's Sumitomo Mitsui.

"We believe that it still leaves the company short of capital relative to peers," Citigroup said, adding that the bank will remain significantly undercapitalised even before any additional structured credit write-downs that may or may not be required.

Barclays Chief Executive John Varley had said about half the capital will be directed at higher (capital) ratios and about half will be directed at new business opportunities.

"While we think this is a legitimate long-term goal for Barclays, we are sceptical that it will provide meaningful growth opportunities in a group context in the short to medium term," Citigroup said.

It estimated that Barclays would need 6.6 billion pounds of additional equity to reach the same capital position as Royal Bank of Scotland and 8.6 billion pounds to meet the European banking sector average.

Barclays, which has lost more than $5 billion on assets hurt by the U.S. subprime crisis and credit crunch, said last week it planned to raise billions of pounds to rebuild its capital base.

Citigroup kept its "sell" rating on the stock and slashed its price target to 275 pence from 350 pence.

Correction: The story incorrectly stated that Barclays may need to raise $18 million. The correct figure is $18 billion.