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BANGALORE (Reuters) - Shares of top banks Citigroup (C.N) and JPMorgan Chase (JPM.N) fell 4 and 5 percent, respectively, after influential analyst Meredith Whitney slashed her earnings outlook for top U.S. banks and said the credit crisis is far from over.
The crisis will extend well into 2009 and perhaps beyond as large U.S. banks will likely incur more than $170 billion in reserve builds by the end of 2009 on top of regular loan-loss provisions, the Oppenheimer & Co analyst said.
"We believe the current credit crisis is far from over," Whitney said in a note dated May 19. "In fact, we believe what lies ahead will be worse than what is behind us."
Whitney became a Wall Street celebrity last year after she pointed to Citigroup's deepening credit losses and correctly predicted that the largest U.S. bank would cut its dividend and go on a capital-raising spree.
In her latest note, Whitney said she expects losses at the big banks to accelerate further and to be "far worse than even the most draconian estimates."
"Either in the form of write-downs or reserve builds, we believe the effect is the same: revenue reversal from years worth of inherently flawed underwriting," Whitney said.
The banks have written down more than $70 billion of losses related to real-estate securities since July, she said. They have also taken more than $25 billion in reserve builds related to on-balance-sheet loans, she added.
Whitney increased her 2008 loss forecast for Citigroup Inc and the next three largest U.S. banks, Bank of America Corp (BAC.N), JPMorgan Chase & Co and Wachovia Corp WB.N. She lowered her second-quarter earnings views for Bank of America and JPMorgan but raised them slightly for Citigroup and Wachovia.
In a separate note dated May 20, Merrill Lynch analyst Kenneth Bruce said he expects credit losses to drive earnings expectations lower, especially for 2009.
Consumers are increasingly seeking bankruptcy protection to avoid the harsh consequences of the credit bubble, Bruce said.
"The rising trend underscores the erosion in consumer credit that will likely persist, as consumers are increasingly burdened with higher non-discretionary expenditures and fewer resources to tap in the aftermath of the coincident housing bubble," he said.
Bruce expects credit card lenders to suffer credit losses due to rising defaults, as consumers remain strapped to meet existing financial obligations.
Oppenheimer's Whitney said a "buyers strike" in the securitization market has put stress on consumer liquidity.
She estimated that more than $3 trillion of liquidity will be extracted from the capital markets by year end, warning that "new and unforeseen strains" will put further pressure on consumer finances.
Most analysts focus on declining profits at investment banks when they talk about the shutdown in the securitization markets, but the far more important consequence of the "buyers strike" is the impact on overall consumer liquidity, consumer spending and ultimately consumer defaults, Whitney said.
"Over time, the bank lending model will reclaim lost lending market share over the mortgage market, but bank balance sheets simply do not have the capacity to provide the liquidity lost by the shutdown in the securitization market," she added.
Whitney rates Citigroup "underperform." She has a "perform" rating on Bank of America, JPMorgan Chase and Wachovia.
In afternoon trade on the New York Stock Exchange, shares of Citigroup fell 3.8 percent to $22.11, Bank of America was down 1.8 percent to $35.46, JPMorgan Chase fell 4.5 percent to $43.90, and Wachovia fell 2.1 percent to $26.79. The KBW Bank Index .BKX was down 2.14 percent.
The following table lists the estimate changes made on the four largest U.S. commercial banks:
Current Prior Current Prior
Bank of America $0.72 $0.91 $2.50 $3 Perform
Citigroup $0.21 $0.20 -$0.58 -$0.45 Underperform
JPMorgan Chase $0.41 $0.72 $1.95 $2.85 Perform
Wachovia $0.63 $0.62 $1.55 $1.70 Perform
Editing by Jarshad Kakkrakandy and Mike Miller