(Adds analyst's comments and background)
Jan 21 (Reuters) - Punk Ziegel analyst Richard Bove cut his 2008 earnings forecast on five U.S. banks, including Merrill Lynch & Co Inc MER.N, even as he narrowed his 2008 loss view on Washington Mutual Inc (WM.N) and upgraded U.S. Bancorp (USB.N) to "buy" from "market perform" on valuation.
Bove, who rates Merrill Lynch a "sell," said he cut his 2008 earnings view on the world's largest brokerage to $4.57 a share from $6.35 a share, and added that while it was possible to believe that the firm's balance sheet had been properly adjusted, it was harder "to plot" a very positive earnings outlook.
The analyst noted that Merrill's holdings in financial instruments that were being questioned by the market, although much reduced, were still sizable at the end of 2007.
"The nature of these holdings suggests that there could be further write-downs if two conditions exist, either the economy turns weaker causing more defaults or buyers continue their unwillingness to own these securities irrespective of economic conditions," Bove wrote in a note to clients.
Merrill Lynch, once the largest underwriter of collateralized debt obligations (CDOs) in the United States, had on Thursday reported around $16 billion in mortgage-related write-downs and adjustments in the worst quarter in its history.
Financial stocks in the U.S. and Europe have been hit badly by the surge in U.S. subprime defaults that began last summer, and many have revealed huge write-downs or sold shares to foreign investors to raise capital.
Bove kept his "buy" recommendation on Wells Fargo and Co (WFC.N), Northern Trust Corp (NTRS.O) and State Street Corp (STT.N).
He continued to rate Washington Mutual with "market perform," but cut his price target on the stock to $15 from $18.
The analyst raised his target on US Bancorp to $40 from $31.
The following table has the estimate changes made by the analyst on the U.S. banks: COMPANY RIC EPS VIEW RATING PRICE TARGET
Current Prior Current Prior Merrill Lynch MER.N $4.57 $6.35 $5.01 $6.81 Sell $51 U.S. Bancorp (USB.N) $2.56 $2.79 $2.84 $3.06 Buy
$40 Northern Trust (NTRS.O) $3.94 $3.95 $4.26 $4.35 Buy
$82 Wells Fargo (WFC.N) $2.53 $2.86 $2.87 $3.11 Buy
$35 State Street (STT.N) $5.18 $5.52 $5.67 $5.86 Buy
$108 Washington (WM.N) -$0.61 -$0.69 $0.78 $0.83 Market $15 Mutual Perform (Reporting by Tenzin Pema in Bangalore; Editing by Anil D'Silva)