Goldman Analyst: Write-Down Concerns at Merrill and Citigroup

Citigroup Inc. (C) and Merrill Lynch & Co. (MER) will likely have to raise additional capital in coming months through equity offerings, asset sales or dividend cuts if forecasts for further write-downs in the first quarter prove correct, Goldman Sachs said Tuesday.

While anticipating significant write-downs in a variety of asset classes this quarter, Goldman sees the most significant write-downs for major U.S. investment banks coming from negative value adjustments on asset-backed securities’ collateralized debt obligations [ABS CDOs] and related credit value adjustments for the third consecutive quarter. Goldman expects about $12-billion of ABS CDO related write-downs from Citigroup Inc., $2-billion from Merrill Lynch & Co., and virtually none from JPMorgan Chase & Co.(JPM).

“Forecasting losses on these assets is a challenge due to the disclosure of the firms’ exposures; nonetheless, we believe it will be the most significant drag on the top line yet again this quarter,” analyst William Tanona told clients in a note. As a result, the firm is lowering its 2008, 2009 and 2010 earnings estimates for Citigroup and Merrill, while keeping them unchanged for JPMorgan.

Goldman’s first quarter loss estimate for Citigroup rises to $1.55 per share from previous expectations of a $1.00 loss, while its full year earnings estimate for 2008 falls to a gain of $0.50 from $1.35, previously. Merrill is now expected to lose $2.45 in the first quarter, compared to previous expectations for a $0.25 gain. For 2008, it is now expected to earn $0.70, compared to a previous forecast of $3.85.

After taking a $3.1-billion credit valuation adjustment on its credit default swaps [CDS] on CDOs in the fourth quarter of 2007, Goldman expects Merrill will take an additional $2.5-billion credit valuation adjustment this quarter. Morgan Stanley (MS) also recorded a credit valuation adjustment on its net monoline exposure, which was $600-million in the first quarter of 2008.

Among the firms Goldman covers, Citigroup and Merrill have the most meaningful exposure to CDOs, with Citigroup’s exposure six times greater that Merrill’s.

Mr. Tanona said:

Global capital market trends were very challenging in 1Q 2008 as credit and equity markets deteriorated significantly in the quarter. Although client franchise activity levels remained very robust in 1Q2008, trends appeared to weaken as the quarter progressed.

Goldman’s price target for Citigroup falls to $20 per share from $25, Merrill’s declines to $42 from $45, and JPMorgan’s rises to $45 from $41.

Comments

[BSCLossMan:]

I'm no expert, but the more write-downs a bank has [it seems] the higher the stock price flies. Yet, if a non-financial company misses earnings by a nano-cent, the stock goes down brutally. Is this insanity?

2008 Apr 02 08:19 AM

[helplessobs...:]

BSCL,
Any high quality non-financial company who's stock is down big time will rally on anything that shows the losses are getting smaller and management is working to right the ship. This is why investing in stocks there are only three things that are important: quality, quality and quality. Junk shares seldom recover from market or management mis-steps.
observer

2008 Apr 02 04:59 PM

[Rumpole:]

Can someone please explain how JPM is not taking similar credit value write downs on their massive $7 trillion in CDS exposure??? Even GS is getting hit now.

2008 Apr 02 09:07 PM