Jan. 14 (Bloomberg) — Citigroup Inc., Bank of America Corp.
and Merrill Lynch %26amp; Co. may report their worst-ever quarter,
beset by $35 billion of writedowns that threaten to crimp profit
through 2008.
The losses have depleted the banks capital, forcing New
York-based Citigroup and Merrill to seek more than $13 billion
from foreign investors, and hobbled their ability to make new
loans. Other sources of fees, including credit cards, are also in
jeopardy as the U.S. economy slows, said CreditSights Inc.
analyst David Hendler, who estimates Citigroup, Bank of America
and Merrill wont earn more this year than they did in 2006.
“The banks are already operating like theyre in a
recession, by ratcheting back on trading and lending, said Adam
Compton, who helps oversee $150 billion at San Francisco-based
RCM Capital, which holds shares of Citigroup, Bank of America and
Merrill. “Everybody has tightened up tremendously.
Citigroup may report a fourth-quarter loss tomorrow of $4
billion, the first for the largest U.S. bank since its commercial
real estate holdings plummeted in value during the early 1990s,
according to a survey of eight analysts by Bloomberg. The company
also may announce that it received a new cash infusion of as much
as $10 billion from investors in China and the Middle East, the
Wall Street Journal reported on Jan. 11, citing people familiar
with the matter.
Merrill, the worlds biggest brokerage, probably will post a
loss of $3.23 billion on Jan. 17, topping the record $2.24
billion loss reported in the third quarter, Stan ONeals last as
chief executive officer, analysts estimate.
New CEOs
John Thain, ONeals replacement, may use the quarters
earnings to write down most remaining investments infected by
subprime defaults, said Sandler ONeill %26amp; Partners analyst
Jeffrey Harte. Citigroup replaced CEO Charles O. “Chuck Prince
III with Vikram Pandit, who turns 51 today, a former investment
banker with a Ph.D. in finance who has formed a dedicated task
force to mitigate losses in the banks subprime investments.
Prince, 58, resigned in early November when the bank said it
might have $8 billion to $11 billion of subprime writedowns,
based on a slide in prices for mortgage-related securities during
October.
In a Nov. 15 interview, Thain, 52, said that in many market
declines, “asset prices tend to go much lower than they
ultimately are worth, and it takes longer to work out of them
than people think.
Writedown Estimates
The loss at Citigroup may include almost $19 billion of
writedowns on holdings of mortgage-related securities known as
collateralized debt obligations, according to Goldman Sachs Group
Inc. analyst William Tanona. CNBC reported earlier today that the
company may announce a $24 billion writedown and job cuts of
17,000 to 24,000. Merrill was battered by $11.5 billion of
writedowns, Tanona estimates.
Bank of Americas fourth-quarter net income probably fell 79
percent to $1.08 billion, the biggest drop in at least a decade,
according to a Bloomberg survey. Sanford C. Bernstein %26amp; Co.
analyst Howard Mason estimates the bank had $5.5 billion of
writedowns on mortgage-related securities.
Earnings per share would be 23 cents, the lowest since the
Charlotte, North Carolina-based company was formed from the 1998
merger of BankAmerica and NationsBank, according to analysts
estimates. Citigroup was put together the same year through the
combination of Travelers Group Inc. and Citicorp.
Bank of America, the second-biggest U.S. bank, increased its
bet on the U.S. housing market last week when it agreed to
acquire unprofitable mortgage lender Countrywide Financial Corp.
of Calabasas, California, for about $4 billion.
JPMorgans Outlook
Bank of America, led by 60-year-old CEO Ken Lewis, may face
writedowns caused by the declining value of Countrywides loan
portfolio, said Sean Egan, managing director of Egan-Jones Rating
Co. in Philadelphia. A 5 percent writedown on the portfolio would
be more than $10 billion, or about half of Bank of Americas 2006
profit of $21 billion, he said.
Even New York-based JPMorgan Chase %26amp; Co., the least damaged
by the subprime losses, faces “a challenging credit environment
mired by further asset write-offs of $3.4 billion, Tanona wrote
in a Dec. 26 report. JPMorgans fourth-quarter earnings may drop
29 percent to $3.21 billion, the first decline in three years,
analysts estimate.
JPMorgan fell 15 percent during the past 12 months in New
York Stock Exchange composite trading, compared with Citigroups
47 percent, Bank of Americas 28 percent and Merrills 43 percent.
Great Depression
Banks havent lost this much money, in relative terms, since
the Great Depression, said Richard Sylla, a professor of the
history of financial institutions and markets at New York
Universitys Stern School of Business.
U.S. banks, insurers and real-estate companies earned about
$1 billion a year during the 1920s until the stock market crash
of October 1929. The industry lost about $500 million in 1930,
$1.7 billion in 1931, and $2 billion in 1932, Sylla said.
Within days of being inaugurated in March 1933, President
Franklin Roosevelt issued an emergency order declaring a “bank
holiday to stem a run on deposits. About 7,000 banks, or a
third of the U.S. total, failed and financial companies didnt
return to profitability until 1936, Sylla said.
Last years collapse of the subprime mortgage market was
worse than the third-world debt crisis of the early 1980s, when
soaring oil prices and surging interest rates pushed Mexico and
other developing countries into default on their loans, said
Charles Geisst, a finance professor at Manhattan College in
Riverdale, New York, and author of “100 Years of Wall Street.
Abu Dhabi
“This is the classic credit crunch, Geisst said. “It
might not have gotten to credit cards, it might not have gotten
to car loans, but its coming.
Citigroup, Bank of America and Merrill probably were
profitable in 2007, earning about $23 billion on a combined basis,
even after the second-half writedowns, according to Bloomberg
data. The banks earned about $50 billion in 2006. They may earn
$44.8 billion this year, analyst surveys by Bloomberg show.
Citigroup, which in November had to seek a $7.5 billion
capital infusion from the ruling family of oil-rich Middle
Eastern emirate Abu Dhabi, may have to cut shareholder dividends
to maintain the capital cushion it keeps to absorb loan losses,
Tanona wrote in a Dec. 26 note.
Even with the Abu Dhabi investment, Citigroups so-called
Tier 1 capital ratio, which regulators monitor to assess banks
ability to withstand loan losses, may fall to 7 percent by the
end of this year, he estimated. While above the 6 percent needed
to maintain its “well-capitalized status from federal
regulators, the capital ratio is below Citigroups own target of
7.5 percent.
Fed Data
Bank of Americas Tier 1 ratio fell to 8.22 percent in the
third quarter, from 8.52 percent in the second quarter and 8.48
percent a year earlier. JPMorgans ratio was 8.4 percent in the
third quarter, down from 8.6 percent a year earlier.
The resulting tightfistedness at the banks may help push the
U.S. economy toward recession, RCMs Compton said. In the third
quarter, less than a tenth of U.S. bank loan officers witnessed
“substantially higher demand for commercial loans, down from
more than 50 percent in the second quarter of 2005, CreditSights
reported, citing data from the Federal Reserve.
The banks “willingness and ability to lend remain the
leading issues for the risk and extent to which current turmoil
in the financial credit markets spreads to the broader economy,
wrote Jeffrey Rosenberg, Bank of Americas senior debt-investing
analyst, in a Dec. 20 report.
Loss Ratios
Profits may suffer as banks set aside higher reserves for
bad loans, Sanford Bernsteins Mason wrote in a Dec. 31 report.
Bank of Americas net loss ratio on commercial loans this year
may average 0.7 percent, compared with 0.42 percent in the third
quarter and more than triple the rate of the fourth quarter of
2006, Mason estimated. Citigroups losses on credit-card loans
may climb to $7.6 billion this year from $6.4 billion last year
and $5.8 billion in 2006.
“A lot of these banks have large consumer portfolios in
addition to the subprime side, said Malcolm Polley, who helps
oversee $1 billion at Stewart Capital Advisors in Pittsburgh,
including Bank of America shares. “As we sink closer to
recession, consumer delinquencies are going to tick up.
U.S. construction loans that were 30 days to 89 days overdue
represented 0.7 percent of those outstanding in the third quarter,
more than double the rate of a year earlier, according to
analysts at Arlington, Virginia-based Friedman, Billings, Ramsey
%26amp; Co. Delinquent commercial loans climbed to 0.36 percent from
0.3 percent in the same period.
Default Rates
The default rate on U.S. junk-grade corporate loans may
reach 2 percent to 3 percent this year, compared with about 0.9
percent in 2007, according to Bank of Americas Rosenberg.
“Credit deterioration will continue to pressure industry
valuations well into 2008, Friedman Billings analysts James
Abbott, David Rochester and Scott Cottrell wrote in the Jan. 3
report. “Even modest upticks in delinquencies can drive lower
returns.
The banks misjudged how bad the home-loan market would get,
and they accumulated more than $100 billion of AAA-rated
securities they thought were safe. This quarters writedowns may
acknowledge that prices for mortgage bonds and collateralized
debt obligations, which repackage assets such as buyout loans and
mortgage bonds into new debt with varying risks, probably wont
recover anytime soon, RCMs Compton said.
Asset Markdowns
Under U.S. accounting rules, banks and other financial firms
have to take losses to “mark the value of tradeable securities
to current market prices. Morgan Stanley marked down some AAA-
rated securities last month to as little as 30 cents on the
dollar, while Zurich-based UBS AG, Switzerlands biggest bank,
took marks as low as 22 cents, Credit Suisse analyst Susan Roth
Katzke said in a Jan. 3 report.
Any holdings remaining after the fourth quarter may have to
be written down further, said Andrew Seibert, who helps oversee
$400 million at Nextier Wealth Management in Pittsburgh. He sold
his bank stocks during the first half of 2007. Even after writing
down subprime holdings by $11.5 billion in the fourth quarter,
Merrill would have about $8 billion left, Tanona said.
“I dont think these guys actually know the total of the
losses they have on the books, Seibert said. “Theyre still
digging through it all trying to figure out whats there.
To contact the reporter on this story:
Bradley Keoun in New York at
