April 1, 2008 / 1:23 PM / 11 years ago

UPDATE 2-GS sees Q1 losses for Citi, Merrill on write-downs

(Adds price targets, details, share movement, byline)

By Sweta Singh

BANGALORE, April 1 (Reuters) - Goldman Sachs said it sees significant losses for Citigroup Inc (C.N) and Merrill Lynch & Co Inc MER.N in the first quarter as it expects sizable write-downs for both investment banks amid deteriorating credit and equity markets.

“If our forecasts are correct, it is likely that these firms may need to raise additional capital in coming months via equity offerings, asset sales and/or dividend cuts,” analyst William Tanona wrote in a note to clients.

Investment banks in the United States continue to be under pressure as they grapple with exposure to high-risk securities and bad debts in a slowing economy.

The global financial sector is seeking to raise additional capital after having sustained more than $200 billion of losses from subprime mortgages and other assets.

For the third consecutive quarter, Tanona is expecting write-downs on asset backed securities (ABS) and collateralized debt obligations (CDOs) to be the “driving force” behind quarterly losses for both Citigroup and Merrill.

The analyst sees about $12 billion of ABS CDO related write-downs for Citigroup, and expects Merrill to take an additional $2.5 billion credit value adjustment on its credit default swaps (CDS) on CDOs for the first quarter.

He said additional write-downs within sub-prime residential mortgage backed securities, Alt-A, and prime, will impact J.P. Morgan Chase & Co (JPM.N), but added that it was difficult to gauge the impact at this point.


For Merrill, the analyst sees a loss of $2.45 a share for the quarter, compared with his prior view of earnings of 25 cents. He sees a loss of $1.55 a share for Citigroup, wider than his prior estimate of a loss of $1.00.

Tanona also lowered his full-year profit forecasts for both Citigroup and Merrill.

For 2008, the analyst expects Citigroup to earn 50 cents a share, down from the $1.35 he had forecast earlier. He expects Merrill to earn 70 cents a share, down from his prior view of $3.85.

Tanona cut his 6-month price target on Citigroup stock by $5 to $20, and that on Merrill by $3 to $42.

Tanona, however, maintained his earnings estimates on JP Morgan, saying he does not see any additional write-downs for the company in the first quarter.

Tanona, who raised his target on JP Morgan stock by $4 to $45, said he expects the company’s first-quarter earnings to be 70 cents a share and 2008 earnings to be $3.30 a share.

Shares of Citigroup, Merrill and JP Morgan were up sharply after Lehman Brothers Holdings Inc LEH.N raised $4 billion of capital from the sale of convertible preferred securities, boosting investor confidence.

Both Citigroup and Merrill shares were up about 8 percent at $23.18 and $43.96 respectively, while those of JP Morgan were up about 6 percent at $45.63 at midday on the New York Stock Exchange.

The S&P Financials Sector Index .GSPF rose about 16 points to 350.59, helped by an 11 percent increase in the value of Lehman shares. (Editing by Deepak Kannan)

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