UPDATE:Goldman Cuts US Brokers, Strongly Advises Selling Citi
By Ed Welsch
Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- The business models of U.S. brokerages and international banks continue to deteriorate and their recovery will take longer than anticipated, Goldman Sachs (GS) told clients Thursday.
The firm cut its recommendation of the sector to neutral from attractive and strongly recommended that investors sell shares of Citigroup Inc. (C), saying it faced multiple problems, including more asset write-downs, higher loss provisions for consumer credit and the potential for more capital raises, dividend cuts or asset sales.
Shares of Citigroup recently fell 5.6% to $17.79 after earlier reaching a new 52-week low of $17.71. The previous low of $17.99 was reached March 17. A Citigroup spokeswoman said the company doesn't comment on analyst reports.
The move came as Goldman itself was downgraded to market perform by analysts at Wachovia "in light of renewed economic fears" and a poor outlook for brokerage business. Goldman is widely considered to be the strongest investment bank in the U.S.
By urging investors to aggressively sell Citigroup and expressing caution on other brokerage firms, Goldman is reversing the positive stance it took on the sector following the near-collapse of Bear Stearns Cos. Wall Street had hoped that March 17 had marked the bottom for financial stocks and write-downs. Although write-downs have been slowing, more problems have cropped up for the banks as their boom-year businesses in structured financial products disappear and their assets tied to consumers deteriorate as the overall economy weakens.
Goldman cut its second-quarter and full-year estimate for several brokers both large and small. The most significant cuts were on Citigroup and Merrill Lynch & Co. (MER) - Goldman now sees both firms posting losses in the second quarter and full year; it put the second-quarter losses at 75 cents a share at Citigroup and $2 a share at Merrill.
Shares of Merrill fell 4% to $34.03 in recent morning trading. A Merrill spokeswoman wasn't immediately available to comment.
Goldman expects Citigroup to take $9 billion in write-downs during the second quarter and Merrill to take $4.2 billion in write downs in the quarter. Both firms are scheduled to report their second-quarter results in mid-July.
Bernstein Research also added to the gloomy chorus on brokers Thursday, swinging its estimate of Merrill's second quarter to a loss. Bernstein expects Merrill to write down $3.5 billion during the quarter on its collatoralized debt obligations, mortgage-related legacy exposures and its counter-party exposure to monoline insurers.
Bernstein said its projection of a second-quarter loss of 93 cents a share could prove to be too optimistic "given the uncertainty of where CDO marks and monoline reserve levels will be this quarter."
During a conference call last week, Citigroup Chief Financial Officer Gary Crittenden said the bank would take "substantial additional marks on our subprime exposure" if current trends continue. He said the second quarter remained challenging but "was characterized in many respects by sequential improvement" over the first quarter, when Citigroup posted a loss of $5 billion on more than $10 billion in write-downs.
"However, the market continues to change rapidly, and volatility remains unprecedented," he said. "This could cause the remainder of the quarter to shape up very differently from what I've just discussed."
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