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Funds News

Bear, Lehman, Citi shares fall on Merrill downgrade

NEW YORK (Reuters) - Shares of Bear Stearns Cos Inc BSC.N Citigroup Inc C.N and Lehman Brothers Holdings Inc LEH.N fell on Tuesday after Merrill Lynch & Co analysts downgraded the companies to "neutral" from "buy" and lowered estimates for the banks' earnings.

Pedestrians walk past a Citibank branch in Sydney, June 28, 2007. Shares of Bear Stearns Cos Inc, Citigroup Inc and Lehman Brothers Holdings Inc fell on Tuesday after Merrill Lynch & Co analysts downgraded the companies to "neutral" from "buy" and lowered estimates for the banks' earnings. REUTERS/Mick Tsikas

Lehman fell 4 percent to $55.31, Citigroup fell 2.2 percent to $46.74, and Bear fell 2.1 percent to $109.80 in morning trading on the New York Stock Exchange.

All three banks are wrestling with credit and mortgage market difficulties, Merrill analysts led by Guy Moszkowski said.

Citi will likely have to write down the value of commitments it made to help finance leveraged-buyout deals, and is likely making fewer mortgage loans and packaging fewer home loans into bonds, the analysts wrote.

Lehman and Bear’s earnings are likely to be hurt by “what is increasingly clearly a post-bubble depression in the mortgage industry and weakness in the corporate credit business as well,” the analysts said.

That’s a bigger drag on earnings for Bear than Lehman, because Lehman is better diversified, Merrill said.

Merrill cut its third-quarter Bear earnings estimate to $1.67 per share from $2.54, and its 2008 estimate to $12.07 per share from $14.38.

Merrill said Lehman’s securitization business is likely to suffer in the third quarter, and said the investment bank is expected to write down some of its mortgage holdings and commitments for leveraged-buyout financings.

Merrill cut its expected third-quarter earnings for Lehman to $1.29 per share from $1.77, and estimated 2008 earnings to $6.80 per share from $8.68.

Merrill’s third-quarter estimate for Citigroup was lowered to $1.06 per share from $1.16, and its 2008 estimate was cut to $4.91 per share from $5.15.

JPMorgan Chase & Co's JPM.N estimates were lowered as well, but Merrill still rates it a "buy" because its valuation is more compelling on a price-to-book basis. Merrill's estimate for JPMorgan Chase third-quarter earnings were cut to 91 cents per share from $1.03, and 2008 estimates were cut to $4.72 per share from $4.91.

Merrill said that as of July 1, about 46.5 percent of the stocks in its banks group coverage universe were rated “buy,” 43 percent were “neutral” and 10.5 percent were “sell.” In its financial services group, about 39.4 percent are rated “buy,” 57.3 percent “neutral” and 3.3 percent are “sell.”

Reporting by Dan Wilchins

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