July 10, 2008 / 1:26 PM / 11 years ago

RPT-UPDATE 2-Morgan Stanley cuts BofA, says banks need capital

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BANGALORE, July 10 (Reuters) - Morgan Stanley cut its rating on Bank of America Corp (BAC.N), and lowered its 2008 earnings view for large-cap U.S. banks saying the banks may have to raise additional $51 billion in capital and record further loan losses.

Analyst Betsy Graseck downgraded Bank of America to “underweight” from “equal weight” and said the nation’s largest retail bank may have to raise $12 billion in capital and cut dividend by 20 percent in order to meet credit losses.

The addition of Countrywide Financial will increase losses for Bank of America, the analyst said in a note to clients.

On July 1, Bank of America completed the acquisition of Countrywide, the largest U.S. mortgage lender which helped fuel a housing boom that went bust when its risky sub-prime loans to borrowers began to fail, for about $4 billion in stock.

Graseck, who also expects Citigroup (C.N) to slash its dividend by 20 percent and raise $11 billion in capital in the fourth-quarter, said the credit crisis was “far from over”.

The investment bank has a “cautious” rating on the large-cap banks. Fall in housing prices will lead to losses on residential mortgage loans, while slowing consumer spending will impact commercial loans, Morgan Stanley said.


Lowering earnings per share for large-cap banks by 37 percent in 2008, and 2009, the analyst said further provisioning of $265 billion for the large-cap banks from second quarter to the first half of 2010 was expected.

“Given the high degree of uncertainty on the ultimate size of the credit losses in this cycle, we believe the remaining underweight is the right call on the banks,” Graseck wrote in a note to clients.

Citigroup (C.N), Wachovia WB.N and Bank of America have the largest capital needs, Graseck said. She has “underweight” rating on all three stocks.

However, Morgan Stanley raised Fifth Third Bancorp (FITB.O) to “equal weight” from “underweight” and said the potential sale of its processor unit could reduce expected capital raises at the Midwest bank.

The investment bank also increased its dividend cut forecasts at several of the large-cap banks in order to bring dividend payout ratios to a range of 40 percent to 50 percent by 2010.

For JPMorgan Chase & Co (JPM.N), the analyst expects a capital raise of $3.4 billion, but sees no dividend cut.


Earlier in July, analysts at Morgan Stanley had said the credit crisis fallout would extend into 2009, and that mortgage asset overhangs will drive additional write-downs as brokers struggle to de-risk their balance sheets.

Exposure to subprime mortgage debt and structured finance products have already resulted in more than $400 billion of write-downs and credit losses industrywide since the middle of last year.

Net writedowns for the quarter is expected to be “the worst since the bust began,” and only marginally smaller than the gross estimate, Fox-Pitt analyst David Trone had said in a note to clients.

Morgan Stanley expects an incremental $2 billion collateralized debt obligation write-down in the second quarter for Bank of America.

For Wachovia WB.N, the investment bank expects further decline in home values to increase cumulative losses.

Citigroup may suffer $8.9 billion of write-downs in the second quarter, resulting in a loss and possibly its second dividend cut this year, and investors should bet the largest U.S. bank’s shares will fall, Goldman Sachs & Co said in June.

Bank of America shares rose 2.4 percent to $22.60 and Citigroup was up 1 percent at $16.61 in mid day trade helped by a broad rally in financials as investors snapped up some of the beaten-down stocks. For Morgan Stanley’s change in estimate and price targets on the banks double click on [ID:nWNA9901] (Reporting by Sweta Singh in Bangalore, Editing by Dinesh Nair) ((sweta.singh@thomsonreuters.com ; within U.S. +1 646 223 8780; outside U.S. +91 80 4135 5800; Reuters Messaging: sweta.singh.reuters.com@reuters.net))

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