June 12, 2009 / 3:20 PM / 10 years ago

UPDATE 2-BofA-Merrill cuts estimates on three big U.S. banks

(Adds estimate changes, stock activity)

June 12 (Reuters) - Bank of America Securities-Merrill Lynch Research said repayment of federal funds by Goldman Sachs (GS.N), JPMorgan Chase (JPM.N) and Morgan Stanley (MS.N) will force a reversal of value for the remaining warrants, and cut its second-quarter profit estimates for the big U.S. banks.

Valuation for the warrants at those banks remains uncertain and is likely to hurt common equity in the third quarter, analysts led by Guy Moszkowski said in a note to clients.

The U.S. Treasury said banks repaying bailout funds also can repurchase warrants that the government holds in their firms “at fair market value,” and many of the approved banks said they intended to do so.

The warrants give the government the right to buy common stock at a predetermined price for up to 10 years and were intended to give taxpayers a chance to share in the profits of healthy banks.

“While the firms should generate more than ample income to absorb the adjustment related to the main TARP payback, the warrant-related hit to capital is unavoidable,” Moszkowski said.

The analyst said the accounting treatment of the charges that these companies would have to take is also uncertain, adding that there was “likely to be a charge to equity without a profit and loss effect, but will do some more work to verify this.” Goldman shares were down 2 cents at $145.13 Friday on the New York Stock Exchange, while those of Morgan Stanley were up 16 cents at $29.67. JPMorgan shares were up 33 cents at $35.27.

Following are the second-quarter estimate changes on the three banks -


Goldman Sachs $2.92 $3.59

Morgan Stanley -$0.23 $0.70

JPMorgan $0.01 $0.30 (Reporting by Anurag Kotoky in Bangalore; Editing by Vinu Pilakkott, Himani Sarkar)

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