(New throughout, adds details, share movement)
By Nivedita Gupta
BANGALORE, Oct 25 (Reuters) - Several brokerages, including Citigroup and Goldman Sachs, cut their rating and target on Merrill Lynch MER.N, a day after the investment bank posted a third-quarter loss, and shares fell as much as 4 percent to a new year-low.
Merrill on Wednesday reported the biggest quarterly loss in its history, hurt by write-downs of $8.4 billion mostly from bad investments related to risky subprime mortgages.
Sanford C Bernstein analyst Brad Hintz aimed his criticism at Merrill’s management, questioning its failure to address the “eight-hundred pound gorilla lurking in the room — What does management intend to do to improve its risk management and fixed income trading functions?”
Hintz reduced his price target on the stock to $78 from $100, and said Merrill’s management team, during its conference call, “dodged and weaved around questions coming from the investor community all the while congratulating themselves for improving their disclosure after taking a massive loss.”
Bank and brokerage stocks have suffered this year as rising subprime mortgage defaults have made investors less willing to take risk, and in particular to buy various forms of debt including repackaged mortgages.
Merrill Lynch shares have sunk more than 35 percent since the start of the year as banks and brokers have been forced to hold on to more assets, tying up their capital and potentially forcing write-downs and credit losses.
Goldman Sachs analyst William Tanona removed Merrill from his America’s buy list and cut his price target to $79 from $92. Echoing other analysts’ views, Tanona said he was surprised to see exposure to collateralized debt obligations (CDO) that was much larger than anticipated.
Tanona expects Merrill to take an additional $4.5 billion of write-downs on its $20.9 billion portfolio of CDOs and subprime mortgages in the fourth quarter.
Wachovia’s Douglas Sipkin cut his rating on Merrill to “market perform” from “outperform” and said the bank is unlikely to outperform other banks which have managed through this period materially better.
Merrill’s write-downs, before hedges, were bigger than the combined $3.6 billion in write-downs and charges recorded by rivals Goldman Sachs (GS.N), Bear Stearns BSC.N, Morgan Stanley (MS.N) and Lehman Brothers LEH.N.
However, Punk Ziegel’s Richard Bove said his skepticism was not related only to Merrill but extended to the whole industry.
Bove cut his price target on Merrill stock to $61 from $74, and maintained his “sell” rating.
Citigroup analyst Prashant Bhatia, however, took a contrarian view and wrote in a note titled Down But Not Out that Merrill’s write-downs seemed appropriate assuming that the credit environment does not weaken further.
Bhatia cut Merrill’s price target to $90 from $115, but maintained his “buy” rating.
Among analysts surveyed by Reuters Estimates, thirteen rate Merrill Lynch “buy” or the equivalent, five rate it “hold,” and one rates it “sell.”
Merrill shares fell to a new year-low of $60.20, before pulling back some of the losses to trade down $1.69 at $61.50 in morning trade on the New York Stock Exchange. (Additional reporting by Ramya Dilip)