Analysts see tough quarter for U.S. investment banks

By Tenzin Pema

BANGALORE (Reuters) - Wall Street research analysts are projecting yet another tough quarter for U.S. investment banks marked by additional writedowns across a series of fixed-income assets amid an already weak operating environment.

Shares of Lehman Brothers Holdings Inc fell as much as 9 percent in morning trade Thursday, after a Citigroup analyst forecast big losses for the fourth largest U.S. investment bank, while a newspaper reported that an intended asset sale had collapsed.

Citigroup analyst Prashant Bhatia widened his third-quarter loss estimate for Lehman Brothers Holdings Inc. Bhatia and Lehman Brothers Inc analyst Roger Freeman also cut their third-quarter earnings estimates for Goldman Sachs Group Inc and Morgan Stanley.

"We are lowering our third-quarter estimates to reflect the difficult operating environment, characterized by lower client-related trading volumes and losses on hard-to-sell assets," Citigroup's Bhatia said.

Bhatia expects Lehman to take fresh asset-related writedowns of $2.9 billion. He expects $1.8 billion in writedowns at Goldman and $1.7 billion at Morgan Stanley.

"Based on further deterioration in several indices, we expect further writedowns, primarily related to mortgage assets," Bhatia wrote in an August 20 note to clients.

Lehman analyst Roger Freeman said writedowns for this quarter would come from exposures to prime residential mortgages, subprime mortgages and securities, Alt-A residential mortgages and securities, collateralized debt obligations, and leveraged loans.

Commercial mortgages have also experienced price depreciation this quarter, as measured by widening commercial mortgage-backed securities spreads and a decline in the CMBX index, which tracks commercial-mortgage-backed securities, Freeman said.

These declines have accelerated in the past couple of weeks, he said.

Banc of America Securities analyst Michael Hecht said he expects large U.S. investment banks to face a "lackluster, low-visibility" environment through 2008, on account of their "still-large" balance-sheet exposure to residential and commercial mortgages.

Troubled-asset disclosures for U.S. brokers and asset managers totals $443 billion, down from $599 billion a quarter ago, Hecht said. He, however, added that there was still quite a "hangover" to work through for the industry.

Among the companies under his coverage, Lehman has the largest exposure to troubled assets at about $72 billion, while Morgan Stanley has the least at about $25 billion, Hecht said.

Financial services firms have recorded more than $400 billion in writedowns on investments, largely as a result of the subprime mortgage crisis which has roiled global markets since last year.

THIRD-QUARTER OUTLOOK

Lehman's Roger Freeman and Citigroup's Prashant Bhatia were the latest among Wall Street research analysts to cut their outlook for U.S. investment banks.