NEW YORK (Reuters) - The embattled financial sector took another hit on Tuesday as JPMorgan Chase and UBS AG cut their earnings forecasts for Merrill Lynch & Co Inc MER.N and said they expect the Wall Street firm to disclose more write-downs.
In turn, Merrill downgraded regional banks Bank of America (BAC.N), PNC Financial (PNC.N) and SunTrust Banks Inc (STI.N), saying the bursting of the housing bubble will continue to hurt lending and home equity.
The sharply lowered earnings expectations for Merrill stood out, though, dashing whatever confidence had been restored last week after the Federal Reserve helped arrange for JPMorgan (JPM.N) to take over Bear Stearns Cos Inc BSC.N, avoiding a systemic meltdown among banks.
“In our view, Merrill Lynch is overexposed to the credit markets, which have been challenging, especially in the areas where Merrill has been most active,” JPMorgan analysts Kenneth Worthington and Funda Akarsu wrote in a note.
Merrill shares were down 2 percent to $47.27 near midday, and the banking sector was the biggest drag on the Dow Jones industrial average.
JPMorgan forecast Merrill would write down an additional $2.1 billion of subprime debt, leading to a loss in the first quarter.
Merrill had $24.4 billion of mortgage-related write-downs in 2007, among the most on Wall Street, according to a Reuters tally.
The earnings forecasts for Merrill and the increasingly negative views on banks are a reminder that the financial sector’s troubles as a result of the crisis of confidence in lending markets are far from over, even after JPMorgan on Monday quintupled its offer for Bear Stearns to $10 a share.
Punk Ziegel analyst Richard Bove said the sweetened offer is quite risky for JPMorgan because of the potential losses at Bear.
“What is most disturbing about this deal is that it uses a great deal of Morgan capital to buy a company that is losing market share, in a series of businesses that are declining in size, with a top management team that is best described as sclerotic,” Bove wrote in a note to clients.
JPMorgan cut its first-quarter forecast for Merrill to a loss of 68 cents a share from a profit of $1.05 a share. It cut its full-year view to $2.75 a share from $5.00.
UBS, citing more expected write-downs and a likely increase in reserves against monoline insurers, said it expects Merrill to post a first-quarter loss of $2.00 a share, compared with a previous forecast for earnings of 59 cents a share.
It cut its full-year forecast to a profit of $1.10 a share from $3.60.
Merrill cut its rating on Bank of America and Suntrust to “sell” from “neutral,” and it downgraded PNC to “neutral” from “buy.”
“The downgrades reflect a weaker earnings outlook (for all three banks) and a recent rebound in their prices driven by Fed rate cutting and other central banking actions, which should ease the pain, but will not preclude a deep and protracted credit cycle, in our view,” Merrill research analyst Edward Najarian said in a note.
After the latest wave of downgrades, Merrill has no “buy” ratings in the bank sector.
Editing by John Wallace