Citigroup Lowers Earnings Estimates at Three Major I-Banks

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Includes: GS, LEH, MER, MS
by: FP Trading Desk

Citigroup (NYSE:C) lowered its fourth quarter earnings estimates for Goldman Sachs Group Inc.(NYSE:GS), Lehman Brothers Holdings Inc. (LEH), and Merrill Lynch & Co. Inc. (MER), while leaving its forecast for Morgan Stanley (NYSE:MS) unchanged.

Analyst Prashant Bhatia reduced his estimate for Goldman by $1.15 to $7 per share, Lehman’s was cut by $0.50 to $1.40, and Merrill’s was reduced from $0.85 to a loss of $2.50. A loss of $0.30 continues to be expected at Morgan.

Citigroup’s estimates for Morgan and Goldman are above consensus, while they are below consensus for Lehman and Merrill.

“Fixed income results will likely be challenged by a much higher level of client risk-aversion,” Mr. Bhatia told clients in a note, adding that November was likely the worst month of the quarter.

He expects an additional $4.5-billion writedown at Merrill due to deteriorating market valuations since mid-October. The firm’s estimated $15-billion of CDO exposure is forecast to be marked down by 15% to 20%, up to the $3-billion mark, while Mr. Bhatia expects its $1.6-billion of residual subprime loan exposure will deteriorate significantly.

He is also forecasting an additional $750-million writedown of Morgan’s net $6-billion CDO exposure. Mr. Bhatia reiterated his “buy” rating on Morgan and Merrill, where he continues to see the best risk/reward.

GS vs. MER vs. LEH 1-yr chart: