Merrill says Lehman faces Q3 loss, $2.5 bln writeoff

BANGALORE (Reuters) - Lehman Brothers Holdings Inc LEH.N, the fourth-largest U.S. investment bank, may post a third-quarter loss, as well as suffer an additional $2.5 billion in fresh writedowns on its residential portfolio for the period, according to Merrill Lynch analyst Guy Moszkowski.

The analyst said Lehman's exposure to the residential market, particularly to "Alt-A," will result in significant writedowns, but added that the company's core business appeared to be "very much intact," with no sign of client losses.

Shares of the company fell 3.6 percent to $16.44 in midday trade on the New York Stock Exchange.

According to Lehman's Chief Financial Officer Ian Lowitt, the company was looking to sell 20 percent of about $65 billion of its exposure to real-estate-related assets in the third quarter, said Moszkowski, who recently met the CFO.

This suggests Lehman may take additional writedowns amid lower prices in the residential market, Moszkowski said.

"The firm appears willing to accept some discount or market impact from the wholesale disposition of assets in order to reduce risk and pressure on its balance sheet," he said.

Lehman did not immediately return a call seeking comment.

Investors have been speculating about the fate of Lehman, the smallest of the major Wall Street investment banks, since the collapse of storied rival Bear Stearns Cos Inc in March. Discredited rumors in recent weeks have pushed down the company's share price.

QUARTERLY LOSS?

Analyst Moszkowski forecast a third-quarter loss of $1.59 a share for Lehman, compared with his prior estimate of a profit of 37 cents.

According to Reuters Estimates, analysts on average expect a profit of 30 cents a share in the third quarter.

"Earnings volatility remains an undeniable part of Lehman's business," Moszkowski said.

But, according to CFO Lowitt, client volumes are consistent with levels seen at this time last year and investment banking market share has improved markedly, the analyst said.

The management expects Lehman to take additional market share as significant troubles at European banks may cause them to retreat from capital markets businesses, Moszkowski said.

Lehman's management was also comfortable with the company's liquidity and capital adequacy, despite the likely continuance of negative marks, the analyst said.

The company has raised about $12 billion of capital this year to strengthen its balance sheet, sold off assets and shaken up top management.

Despite repeated assurances by Lehman management about the investment bank's capital and liquidity position, its stock has fallen 74 percent this year.

The analyst cut his price target on the stock to $25 from $28, but maintained his "neutral" rating.

(Reporting by Tenzin Pema in Bangalore; Editing by Vinu Pilakkott)