THE RATINGS GAME
More credit costs seen weighing on banks, brokers
Citigroup may face $12 billion in additional write-downs, Goldman says
By Greg Morcroft, MarketWatch
Last update: 2:03 p.m. EST Feb. 25, 2008
NEW YORK (MarketWatch) -- Analysts at Goldman Sachs cut estimates for the nation's top banks and brokers Monday and said these major institutions would likely report write-downs of between $1 billion and $12 billion for soured real-estate loans and related exposures.
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Goldman's estimates of new write-downs ranged from $1.4 billion it expects for Bear Stearns Cos. (BSC
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BSC) all the way up to a whopping $12 billion projected for Citigroup Inc. (C
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"Although many of the write-downs in the back half of 2007 focused primarily on subprime and CDOs, we expect first-quarter 2008 write-downs to be spread across all aspects of residential mortgage-backed securities including subprime, Alt-A and prime, commercial mortgage-backed securities and leveraged loans. We forecast first quarter write-downs of approximately $1 billion to $12 billion for each of our large-cap companies across all of these categories," the Goldman analysts concluded.
Goldman cut estimates for Morgan Stanley (MS
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Perhaps most notably, Goldman reduced Citigroup's first-quarter profit estimate to 15 cents a share from 40 cents and pared its full-year forecast to $2.50 a share from $2.75 previously.
Also Monday, Citigroup's profit forecast was slashed by Oppenheimer & Co. See related story.
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"Our new estimate assumes about $12 billion of additional write-downs across leveraged loans, residential mortgage-backed securities and commercial mortgage-backed securities. We believe write-downs from its asset-backed CDOs will account for the largest percentage of the overall write-down. Citigroup has also been one of the least aggressive in terms of its write-down of these assets, in our view," Goldman's analysts said.
Meanwhile, they cut J.P. Morgan Chase's earnings outlook to 70 cents a share from 96 cents for the quarter and to $3.44 a share from $3.70 for the full year.
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"Our new estimate assumes about $3.4 billion of additional write-downs across leveraged loans, residential mortgage-backed securities and commercial mortgage-backed securities as well as our assumption for no private-equity gains in the quarter (previously we assumed about $700 million in gains) based on most recent management guidance," Goldman concluded.
As for Bear Stearns, Goldman cut its projection of earnings for the fiscal first quarter, to 55 cents a share from $2.16, as well as its full-year estimate, down to $7.40 a share from $9 previously.
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"Our new estimate assumes about $1.4 billion of additional write-downs across Bear's portfolio (although the primary drivers are likely to be from Alt-A and commercial mortgage-backed securities). Absent these write-downs, our forecast would have still had earnings down 10% year over year, a clear indication the firm is suffering from a global slowdown in mortgages," Goldman said.
And for Lehman, Goldman cut its first-quarter profit estimate to 45 cents a share from $1.68 previously, and its full-year forecast went to $4.85 a share from $6.05.
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"Our new estimate assumes about $3.5 billion of additional write-downs across leveraged loans, residential mortgage-backed securities, and commercial mortgage-backed securities. Lehman has the largest absolute commercial mortgage-backed securities exposure of the group at $40 billion, and we expect this asset class to contribute close to half of the write-downs this quarter," the Goldman analysts said.
Not so bad
They also trimmed estimates for Morgan Stanley's earnings for the first quarter to $1.25 a share, down from $1.65 a share, and took down their full-year projection to $6 a share from $6.40.
"Although Morgan Stanley will likely have some meaningful negative valuation adjustments this quarter on leveraged loans and commercial mortgage-backed securities, we do not believe the firm will be as impacted as some peers as it appears that the firm was more aggressive on its subprime write-downs last quarter, it has less Alt-A exposure than some of its peers, and its commercial mortgage-backed securities portfolio is more of an international concentration, which has been less impacted than the U.S., in our view.
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"Our new estimate assumes about $3.1 billion of additional write-downs across leveraged loans, residential mortgage-backed securities and commercial mortgage-backed securities," Goldman concluded.
Finally, the analysts revised lower their Merrill Lynch estimates, down to 25 cents a share from 90 cents for the first quarter, and to $3.85 a share from $4.40 for the full year.
"Our new estimate assumes about $4 billion of additional write-downs across leveraged loans, CDOs and commercial mortgage-backed securities. We also assume a smaller write-down on the firm's remaining Alt-A and subprime residential mortgage-backed securities portfolios. Merrill was one of the more aggressive firms in writing down its CDO exposure in the fourth quarter of 2007," Goldman said. End of Story
Greg Morcroft is MarketWatch's financial editor in New York.
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