Large U.S. banks and brokerages will suffer additional write-downs of more than $10 billion in the fourth quarter as deteriorating credit trends continue to undercut the value of subprime mortgages and related securities, a Deutsche Bank analyst said.
Credit worries continued to hammer U.S. banks stocks on Friday, with shares of Merrill Lynch & Co Inc falling to a two-year low after dropping more than 9 percent in morning trading.
The bulk of the write-downs will happen at Citigroup and Merrill, Deutsche analyst Mike Mayo said. He estimates each company will have about $4 billion in write-downs in the current quarter, mainly because of their exposure to subprime mortgages and collateralized debt obligations.
Mayo downgraded Merrill shares to hold from buy.
Merrill shocked markets last week when it wrote-down $8.4 billion in the third quarter. The company ousted Chief Executive Stan O'Neal and still needs to work through more $20 billion in exposure to risky subprime loans and CDOs.
Meanwhile, Citigroup CEO Chuck Prince is under fire for huge write-downs, declining profit and evaporating shareholder value.
Mayo said other write-downs could occur at Bear Stearns Cos Inc, Morgan Stanley, Bank of America and Wachovia Corp.
Mayo also said banks will need to bolster their balance sheets because reserves to loans (1.2 percent) are the lowest since 1983. But as banks bring capital ratios back to historical levels that could shave 20 percent off profits, Mayo said.
(Reporting by Tim McLaughlin)