CITIGROUP, Bank of America Corp and Merrill Lynch & Co may report their worst-ever quarter, beset by US$35 billion in writedowns that threaten to crimp profit through 2008.
The losses have depleted the banks' capital, forcing New York-based Citigroup and Merrill to seek more than US$13 billion from foreign investors, and hobbled their ability to make new loans, Bloomberg News reported.
Other sources of fees, including credit cards, are also in jeopardy as the US economy slows, said CreditSights Inc analyst David Hendler, who estimates Citigroup, Bank of America and Merrill will not earn more this year than they did in 2006.
"The banks are already operating like they're in a recession by ratcheting back on trading and lending," said Adam Compton, who helps oversee US$150 billion at San Francisco's RCM Capital, which holds shares of Citigroup, Bank of America and Merrill. "Everybody has tightened up tremendously."
Cash infusion
Citigroup may report a fourth quarter loss today of US$4 billion, the first for the largest US bank since its commercial real estate holdings plummeted in value during the early 1990s, according to a survey of eight analysts by Bloomberg. The company may also announce that it received a new cash infusion of as much as US$10 billion from investors in China and the Middle East, the Wall Street Journal reported on January 11.
Merrill, the world's biggest brokerage, will probably post a loss of US$3.23 billion on January 17, topping the record US$2.24 billion loss reported in the third quarter, Stan O'Neal's last as chief executive officer, analysts estimate.]
John Thain, O'Neal's replacement, may use the quarter's earnings to write down most remaining investments infected by subprime defaults, said Sandler O'Neill & Partners analyst Jeffrey Harte. Citigroup replaced CEO Charles O. "Chuck" Prince III with Vikram Pandit, who turned 51 yesterday, a former investment banker with a Ph.D. in finance who has formed a dedicated task force to mitigate losses in the bank's subprime investments.
Prince, 58, resigned in early November when the bank said it might have US$8 billion to US$11 billion of subprime writedowns, based on a slide in prices for mortgage-related securities during October.
In a November 15 interview, Thain, 52, said that in many market declines, "asset prices tend to go much lower than they ultimately are worth, and it takes longer to work out of them than people think."
The loss at Citigroup may include almost US$19 billion of writedowns on holdings of mortgage-related securities known as collateralized debt obligations, according to Goldman Sachs Group Inc analyst William Tanona. Merrill was battered by US$11.5 billion of writedowns, Tanona estimates.
Bank of America's fourth-quarter net income probably fell 79 percent to US$1.08 billion, the biggest drop in at least a decade, according to a Bloomberg survey. Sanford C. Bernstein & Co analyst Howard Mason estimates the bank had US$5.5 billion of writedowns on mortgage-related securities.
Earnings per share would be 23 cents, the lowest since the Charlotte, North Carolina-based company was formed from the 1998 merger of BankAmerica and NationsBank, according to analysts' estimates.
Increased bet
Bank of America, the second-biggest US bank, increased its bet on the US housing market last week when it agreed to acquire unprofitable mortgage lender Countrywide Financial Corp of Calabasas, California, for about US$4 billion.
Bank of America, led by 60-year-old CEO Ken Lewis, may face writedowns caused by the declining value of Countrywide's loan portfolio, said Sean Egan, managing director of Egan-Jones Rating Co in Philadelphia. A five percent writedown on the portfolio would be more than US$10 billion, or about half of Bank of America's 2006 profit of US$21 billion, he said.
Even New York-based JPMorgan Chase & Co, the least damaged by the subprime losses, faces "a challenging credit environment mired by further asset write-offs" of US$3.4 billion, Tanona wrote in a December 26 report.
Banks have not lost this much money, in relative terms, since the Great Depression, said Richard Sylla, a professor of the history of financial institutions and markets at New York University's Stern School of Business.