Wall Street analysts forecast a second-quarter loss for Merrill Lynch & Co, and said the world's largest brokerage will likely incur total write-downs in the range of $3.5 billion to $4.2 billion, causing shares to fall more than 5 percent.
Analysts at Goldman Sachs and Sanford C. Bernstein said they expect Merrill to post its fourth straight quarterly loss from its exposure to collateralized debt obligations (CDOs) and hedges.
"Yet again, the biggest swing factor for Merrill's upcoming second-quarter results will be the severity of the write-downs related to Merrill's CDO and mortgage-related exposures," Bernstein analyst Brad Hintz wrote in a note to clients.
In addition, the level of valuation reserves Merrill takes against its CDO and mortgage-backed securities hedges will also play a large role in the ultimate size of earnings losses the firm reports, Hintz said. He estimates Merrill will take $3.5 billion in writedowns for the second quarter.
In a separate report dated June 25, Goldman Sachs analyst William Tanona forecast write-downs of $4.2 billion at Merrill, and $8.9 billion at Citigroup Inc.
"We expect write-downs for Citigroup and Merrill to outpace what we saw from Morgan Stanley and Lehman Brothers Holdings Inc recently, due to Citigroup's and Merrill's large exposures to ABS (asset-backed security) CDOs and associated hedges with the monolines (insurers)," Tanona said.
Tanona expects Merrill to post a quarterly loss of $2 a share, compared with his earlier estimate of a profit of 25 cents. For 2008, he sees a loss of $3.55, compared with his prior forecast of a profit of 8 cents.
Bernstein's Hintz also forecast a second-quarter loss of 93 cents a share compared with a prior profit per share view of 82 cents. He also expects Merrill to post a loss of $1.07 a share in 2008. He earlier saw a profit of 56 cents a share for 2008.
Earlier this month, Banc of America Securities analyst Michael Hecht and Lehman Brothers' Roger Freeman had also forecast a second-quarter loss for Merrill and said the brokerage would take additional write-downs during the period. BofA's Hecht estimated that Merrill would incur $3.5 billion in write-downs.
Shares of Merrill were trading down more than 4 percent to $33.92 in morning trade on the New York Stock Exchange. Through Wednesday, they have plunged 34 percent this year.
In morning trading, the Standard & Poor's Financials Index was down 2.7 percent, after Goldman's Tanona also cut his view on the U.S. brokerage sector, saying a recovery from the year-long credit market tightening would take longer than previously anticipated.
"CDO OVERHANG" CONCERNS
Merrill now has the largest balance sheet exposure to CDO assets among the large brokerage firms, unlike in the past cycles, with $26.3 billion of CDOs still on its balance sheet at the end of the first quarter, Bernstein's Hintz said.
"We believe the CDO overhang and the hedge exposure to monolines will remain an ongoing concern for the firm over the next 24 months," Hintz said.
Merrill has taken $30.9 billion of writedowns over the past three quarters, more than the $27.3 billion of writedowns taken by the other three Wall Street investment banks -- Goldman Sachs Group Inc, Lehman Brothers and Morgan Stanley -- combined over the past four quarters, Hintz said.
Financial institutions globally have written down more than $400 billion in assets amid the credit crunch.
(Reporting by Tenzin Pema in Bangalore; Editing by Jarshad Kakkrakandy)