(Reuters) - Merrill Lynch & Co Inc MER.N will post a much wider loss in the third quarter, making it the fifth consecutive loss-making quarter for the investment bank, hurt by $8.5 billion in net writedowns, Fox-Pitt Kelton analyst David Trone wrote in a note to clients.
The $8.5 billion writedowns will include $4.4 billion loss on sale of asset-backed securities collateralized debt obligations and $1.3 billion loss on termination of hedges with monolines, Trone said.
He also expects writedowns of $1.3 billion for “Alt-A” mortgages, $600 million for prime mortgages and $450 million for sub-prime mortgages.
Expenses for the quarter may include $2.5 billion in reset payment to Temasek, $2.4 billion in dividend payments resulting from conversion of $4.9 billion in preferred to common shares, and $125 million in fines related to auction rate securities, he said.
Merrill Lynch made a reset payment of $2.5 billion to its largest shareholder Temasek Holdings TEM.UL in July, when Temasek furthered its stake, as an adjustment to the price of its original investment made in December 2007. “Excluding write-downs, we expect 3Q08 revenues to be flattish sequentially across almost all of the businesses, as capital markets activity remains depressed,” he added.
Trone, who rates the stock “in line,” expects Merrill to report a loss of $5.07 a share in the third quarter, compared with his prior view of a loss of $2.86 a share.
Trone also cut his fourth-quarter profit estimate to 23 cents a share from 35 cents a share to reflect a loss of $325 million from Merrill’s plan of buying back $3.25 billion in auction rate securities.
On Tuesday, Wachovia Capital Markets also widened its third-quarter and full-year loss estimates for Merrill citing expected losses in its fixed income, currencies and commodities (FICC) segment and further writedowns.
Trone expect Merrill shares to trade with those of Bank of America (BAC.N), given the fixed exchange basis of the pending transaction.
Merrill Lynch agreed to be taken over by Bank of America in an all-stock deal worth $50 billion, after one of the worst-ever weekends on Wall Street that saw investment banking giant Lehman Brothers Holdings Inc LEHMQ.PK file for bankruptcy protection.
Shares of the company were trading down 6 percent at $16.88, while those of Bank of America were down 8 percent at $21.86 in morning trading on the New York Stock Exchange.
Reporting by Amiteshwar Singh in Bangalore; Editing by Jarshad Kakkrakandy