Fox-Pitt Kelton analyst David Trone on Tuesday downgraded Morgan Stanley shares to in-line from outperform, citing the likelihood the bank will write down asset-backed securities, collateralized debt obligations and other assets by as much as $6 billion.
Once-safe tranches of ABS and CDOs have seen values declining sharply lately, following multilevel (credit) ratings downgrades, Trone said in a client note.
Trone acknowledged Morgan does not disclose its ABS and CDO exposure, so that his forecasts are just educated guesses and that data in filings may already be obsolete.
That said, he estimates Morgan's $33 billion in credit and real estate assets include a maximum exposure of $25 billion to ABS and CDOs.
Straight losses on mortgages could lead to an additional $500 million in losses, based on a 15 percent write-down of about $3 billion of residual mortgage interests, he said. Trone cautioned that structured investment vehicles (SIVs) also may lead to more losses.
Factoring all these exposures, total losses in the fourth quarter could reach $6 billion, he said.
We suggest an outright avoidance (of Morgan shares) until either management discloses more specific exposure data and it proves smaller than we thought, or they actually take write-downs big enough to get beyond this, Trone wrote.
(Reporting by Joseph A. Giannone, editing by Steve Orlofsky)