Feb 1 (Reuters) - Goldman Sachs said it expects U.S. banks to incur mark-to-market losses of $60 billion in 2008 on commercial real estate and exotic mortgage loans, that represent the most significant risk to earnings and capital.
Credit concerns should drive relative performance in financials, despite recent rate cuts by the U.S. Federal Reserve, the brokerage said.
Total credit losses from commercial real estate (CRE), residential mortgage, excluding subprime, consumer and corporate loans will likely amount to $330 billion, compared with total subprime-related losses of $210 billion, the brokerage said.
"We see CRE losses as the most significant "problem area" after subprime," analyst James Fotheringham wrote in a note to clients.
CRE prices are expected to fall 21 percent to 26 percent from current levels, and mark-to-market losses in 2008 from commercial mortgage-backed securities and CRE-related collateralized debt obligations (CDO) exposure could reach $20 billion, Fotheringham said.
"However, the remaining losses from CRE loans are expected to fall over a longer time frame than we have seen for subprime loans, which should limit the short-term capital strain."
Mark-to-market losses on exotic residential mortgage-backed securities and related CDOs could reach $40 billion, as house price depreciation should drive defaults, Fotheringham said.
He expects house prices to fall 10 percent to 12 percent from current levels.
Fotheringham sees a $50 billion increase in consumer- and corporate-related losses in 2008 compared with 2007.
First Horizon National Corp (FHN.N), the largest bank in Tennessee, and auto finance company AmeriCredit Corp ACF.N were added to Goldman's Americas conviction sell list.
The analyst said he favors conservative retail banks and rate sensitive insurance names, adding that his top defensive picks were "buy"-rated U.S. Bancorp (USB.N), Aflac Inc (AFL.N), IntercontinentalExchange Holdings Inc (ICE.N) and Federated Investors Inc (FII.N). (Reporting by Tenzin Pema in Bangalore; Editing by Deepak Kannan)