(Corrects to show that Wachovia shares were down 3 cents, not more than 10 percent, in penultimate paragraph)
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By Tenzin Pema
BANGALORE, Sept 23 (Reuters) - The credit crisis that began last summer has intensified so much that any U.S. government bailout plan has “little hope” of improving core fundamentals over the near and medium term, said analyst Meredith Whitney.
The Oppenheimer & Co analyst cut her outlook for U.S. banks and forecast further dividend cuts and capital raises at banks. She projected a quarterly loss for Citigroup Inc (C.N).
“Since the onset of the credit crisis, over $2 trillion less liquidity has flown through the U.S. domestic capital markets than during...a year prior,” Whitney said.
“With that much less available capital, both consumers and corporations have and will spend less,” she added.
As the consumer comes under more pressure in the difficult economy, credit card debt may grow, Whitney wrote in a note to clients.
Whitney, however, noted that tighter credit standards and credit line reductions have already strained more consumers into defaulting across the spectrum of lending products.
“Credit market disruption has had underappreciated consequences on the economy... what started last summer has accelerated and intensified so much so that we believe any government bailout plan has little hope of improving core fundamentals over the near and medium term,” Whitney said.
The Bush administration has proposed a $700 billion rescue fund to absorb impaired credits that have clogged financial markets and brought to the brink of insolvency one major financial institution after another.
On Tuesday, U.S. Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson urged Congress to act swiftly on the proposed bailout of the financial system and warned of dire consequences if they delay.
Oppenheimer’s Whitney expects the country’s GDP to take a hit from likely moves by state governments to cut costs.
Given that over 12 percent of the U.S. GDP is driven by state and local government spending, and with many key states’ 2009 budgets being under-funded, governments will be forced to cut costs and this will weigh significantly on GDP, she said.
Whitney said home prices were not close to bottoming and expects prices to ultimately be at least 25 percent lower from current levels. She also sees further declines in homeownership rate.
The unemployment rate, which is up over 40 percent year-on-year in key states, is “headed materially higher,” Whitney said.
Analyst Whitney forecast a third-quarter loss of 36 cents a share for Citigroup. She had a prior profit view of 8 cents a share. She widened her fiscal 2008 loss estimate for Citigroup to $2.30 a share from $1.43 a share.
Whitney widened her third-quarter loss forecast for Wachovia Corp WB.N to 31 cents a share from 15 cents, and for fiscal 2008 to a loss of $5.18 a share from $5.
She cut third-quarter earnings estimates for Bank of America Corp (BAC.N) to 40 cents a share from 75 cents, for JPMorgan Chase & Co (JPM.N) to 21 cents a share from 40 cents a share, and for Wells Fargo & Co (WFC.N) to 13 cents a share from 17 cents.
For fiscal 2008, Whitney cuts earnings estimates for Bank of America to $1.85 a share from $2.48, for JPMorgan to $1.65 a share from $1.95, and for Wells Fargo to $1.37 a share from $1.41.
Shares of Citigroup were down more than 1 percent at $19.78 in morning trade Tuesday on the New York Stock Exchange, while those of Wachovia were down 3 cents at $14.78.
Bank of America shares were up about 2 percent at $34.80, while shares of JPMorgan were up more than 1 percent at $41.41 and Wells Fargo’s up more than 3 percent at $36.36. (Editing by Jarshad Kakkrakandy)