Friday, November 02, 2007

Coming to Wall Street - a $10B hit

Deutsche Bank analyst sees mortgage fallout affecting earnings through end of year; Merrill, Citi to be hit hardest.

By Grace Wong, CNNMoney.com staff writer

LONDON (CNNMoney.com) -- Banks are likely to mark down another $10 billion of mortgage assets in the fourth quarter, according to one analyst's estimates.

Deutsche Bank analyst Michael Mayo said in a note Thursday that banks and brokerages are likely to see their earnings pressured through the rest of 2007.

Merrill Lynch & Co. Inc. (Charts, Fortune 500) and Citibank Inc. (Charts, Fortune 500) are expected to be hit the hardest. Mayo estimated each bank would write down $4 billion in the fourth quarter.

He said Bear Stearns Cos. Inc. (Charts, Fortune 500), Morgan Stanley (Charts, Fortune 500), Bank of America Corp. (Charts, Fortune 500) and Wachovia Corp. (Charts, Fortune 500) are also likely to take markdowns.

Banks have taken massive hits from risky mortgage securities in the third quarter. Merrill Lynch wrote down $7.9 billion, and Citi took a $2.2 billion markdown due to mortgage-backed securities and credit trading losses.

Fears of more writedowns have stoked credit worries and raised investor anxiety. The Dow Jones industrial average plummeted 362 points on Thursday - its fourth-biggest point decline of the year - and kept falling on Friday.

Stocks in the financial services sector led declines. Merrill stock sank 8 percent in morning trading on Friday. Citi shares fell about 2 percent and are at their lowest level in more than four years.

The pain from the subprime wipeout isn't likely to abate anytime soon. Mayo said mortgage problems could cut bank earnings by 10 to 25 percent over the next two to three years.

The crisis has turned up the heat on Wall Street CEOs. Merrill chief executive Stanley O'Neal stepped down earlier this week amid mounting criticism of the firm's risk management practices. Citi's Chuck Prince and Bear Stearns' James Cayne are also facing scrutiny.

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