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US investment banks fall to analysts’ knife

Cuts made to profit, share price forecasts in the face of continued credit market turmoil

(LONDON/NEW YORK) Citigroup, the biggest US bank, and Goldman Sachs, the largest securities firm, had their earnings estimates cut by analysts who say credit-market ‘turmoil’ would generate losses into next year.

The collapse of the US sub-prime mortgage market has also prompted analysts to reduce earnings estimates for New York-based Morgan Stanley, Merrill Lynch, Lehman Brothers and JPMorgan Chase & Co.

CIBC World Markets’ Meredith Whitney, whose downgrade of Citigroup last month helped wipe out US$369 billion of US stockmarket value, has cut her 2008 profit estimate for the bank by 10 per cent and predicts more losses from mortgages.

Additional writedowns would add to the US$66 billion that securities firms and banks have already announced for mortgage-related assets hurt by the worst US housing recession in 16 years.

‘Stability will only be reached when sellers ultimately clear assets, cleansing their balance sheets,’ Ms Whitney wrote in a note to investors. ‘We anticipate that timing to be nearer to the second half of 2008 than the first.’

Mortgages to borrowers with home equity of less than 10 per cent will generate 2008 losses of as much as US$6.5 billion for New York-based Citigroup, Ms Whitney said.

Goldman’s fourth-quarter earnings estimate has been cut to US$7 a share from US$8.15 by Citigroup analysts.

Citi Investment Research analyst Prashant Bhatia now expects Merrill, the third-largest US securities firm by market value, to report a loss of US$2.50 a share for the fourth quarter. He had previously estimated a profit of 85 US cents. The analyst has also cut his share price forecast to US$85 from US$90.

CIBC has also lowered its 2008 and 2009 earnings-per-share estimates for JPMorgan, the third-biggest US bank, by 10 per cent. Ms Whitney has cut her share price estimate for Morgan Stanley, second to Goldman among securities firms, to US$68 from US$78 because of the ‘intense credit-market disruptions’ of the past three weeks.

She has also reduced her 2008 profit prediction to US$7.50 a share from US$9.30.

JPMorgan, also based in New York, will fare better than its rivals because of greater ‘flexibility provided by its excess capital’, according to Ms Whitney.

JPMorgan has fallen the least this year among the top five US banks listed on the New York Stock Exchange, with a 7 per cent decline. The stock was up 75 US cents, or 1.7 per cent, at US$44.90 in composite trading at 4pm on Wednesday.

Citigroup, down 40 per cent this year, climbed US$1.14 to US$33.69. New York-based Morgan Stanley, the second-largest US securities firm by market value, has lost 26 per cent this year. It rose 10 US cents to US$50.11 on Wednesday.

Goldman shares rose to US$218.26 from US$215.22.

Citigroup analysts’ Q4 earnings estimates for Lehman, the No 4 US securities firm, have been cut to US$1.40 a share from US$1.90.

Merrill rose 62 US cents to US$57.75 on Wednesday and Lehman advanced to US$60.01 from US$59.61.

 

Source: Bloomberg (Business Times 7 Dec 07)

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