(Adds brokerage note details)
Jan 30 (Reuters) - Oppenheimer said it saw additional write-downs for U.S. financial institutions in 2008 of a minimum of $40 billion on the impact of monoline downgrades, but added the figure could be as large as $70 billion, noting that majority of the write-downs would be concentrated amongst Citigroup (C.N), Merrill and UBS UBSN.VX (UBS.N).
The brokerage downgraded Merrill Lynch MER.N to “underperform” from “perform”, citing valuation and negative outlook related to monoline insurers.
Oppenheimer said further downgrades of monoline insurers by rating agencies could put another $100 billion in assets held by banks in jeopardy of further write-downs, adding that it foresees a write-down of about $10 billion at Merrill if the downgrade happened.
Bond insurers have been clobbered by losses from backing mortgage-related securities, which have plunged in value during the past year. With their financial strength damaged, New York recently worked to broker a rescue plan for insurers involving Wall Street banks who otherwise might face big losses on claims that would no longer be covered.
The “AAA” ratings of these bond insurers are under threat as ratings agencies require that they raise additional capital to hold the top ratings, after revising loss forecasts due to deterioration in risky residential mortgages.
Stocks of monoline insurers such as Ambac Financial Group Inc ABK.N, MBIA Inc (MBI.N) and ACA Capital Holdings ACAH.PK have lost more than 75 percent of their market value, Oppenheimer noted.
Meanwhile, Sanford C. Bernstein cut its price target on Merrill Lynch to $53 from $55 and lowered 2008 estimates on the company.
Bernstein, which has a “market perform” rating on Merrill, said it believed that the company’s holding of troubled assets on its balance sheet, even the hedged ones, is a “recipe for taking more writedowns.”
The brokerage pointed out that management’s goal to achieve 20 percent return on equity in 2008 is unlikely in the near term.
Oppenheimer cut its 2008 earnings estimates on Merrill to $4.50 a share from $4.88, and 2009 estimates to $5.50 a share from $5.63, while Bernstein cut its 2008 earnings per share view on the stock to $4.15 a share from $4.24.
Shares of Merrill were down almost 1 percent at $57.05 in trade before the bell, after closing at $57.47 Tuesday on the New York Stock Exchange. (Reporting by Ramya Dilip in Bangalore; Editing by Bernard Orr)