Citi may write down another $17 billion for Q1, research firm says
Other big U.S. banks will report sizable write-downs as well, predicts CreditSights
By Marine Cole
April 8, 2008
Banks’ first-quarter earnings will deliver more bad news, reflecting higher loan loss provisions and lower revenue from fees.
“Back in January 2008, there still seemed to be hope that the economy would avoid a recession and that the second half of 2008 would bring a turnaround for banks,” said independent research agency CreditSights in a report published Tuesday. “However, since that time, the first quarter brought another leg down in housing prices and equity market averages.”
CreditSights estimated that Citigroup will likely report the biggest write-downs for Q1. The write-downs could range from $15.2 billion to $16.8 billion, CreditSights reckons, depending on whether valuation reserves related to financial guarantors are included in the tally. The bulk of write-downs would still be in collateralized debt obligations made of asset-backed securities.
CreditSights estimates that write-downs at Bank of America could range from $8.8 billion to $9.9 billion. At J.P. Morgan, the hit could be around $7.5 billion.
Hardly cheery stuff, but the news is not all bad. UBS’s $19 billion write- down for the first quarter brought the Swiss bank’s tally to about $37 billion. But the announcement of the first-quarter write-down also sent the bank’s share price up 12%.
Similarly, CreditSights believes Q1 write-downs for U.S. banks may be met by a positive, “end-is-near-type reception.”
Nevertheless, credit quality remains a concern. For instance, J.P. Morgan indicated at its February investor day that the outlook for residential real estate is still weak. Executives at the bank stated they would build reserves in the first quarter to reflect substantially higher losses in home equity.
Fifth Third also cited weakness in its home equity portfolio. Other areas within consumer lending will also show more signs of softness. Both Capital One and Wachovia, for instance, have indicated that losses on auto loans are rising.
Commercial real estate looks set to worsen too, said CreditSights. KeyCorp and Wachovia have recently reported problems selling down their commercial real estate securitization holdings.
Another complication for banks: lower fee income may well drag down earnings in the first quarter. “While core areas of fee income, such as deposit and overdraft fees, should be roughly stable to slightly higher, we expect most all areas of capital markets-based fees to be under pressure,” according to CreditSights.
Trust and investment management fees, for instance, may show pressure from the declining stock market. Meanwhile, corporate banking fees could also tail off, as mergers and acquisitions activity has declined in recent months. |
