Banks in dark over cost of credit turmoil
Shares in the global investment banks swung wildly again on the 16th of August, with Bear Stearns leading a late surge to jump 13 per cent and Lehman Brothers rising 6 per cent.
Some analysts attributed the Bear move to speculation it might bring in a minority investor, after reports that it was in talks with CITIC of China.
More broadly, the sector's volatility reflects the challenge investors face in assessing the effects of the credit market turmoil. The banks themselves have little idea what the damage will be in coming weeks. Analysts do not even know what the damage is to date.
The Financial Times reported that Citigroup Inc. lost more than $700m on credit products in July 2007. The bigger problem ahead could be the leveraged loans it is unable to sell and will have to mark down.
Howard Mason, analyst at Sanford Bernstein, estimated Citi could face markdowns of up to 20 per cent or $1.5bn at the end of the quarter. Adding in subprime losses and the $700m, he reaches a worst-case $3bn. But the losses will be cushioned by lower staff pay. Mr Mason assumes a full 50 per cent of the losses would come out of pay - Citi's normal ratio - bringing the $3bn down to $1bn after tax.
But Citigroup and JP Morgan Chase have large consumer businesses to dilute the impact and, along with Credit Suisse, their share prices have held up best in the past month, falling little more than the market overall.
David Trone, analyst at Fox-Pitt Kelton, on Thursday slashed his Morgan Stanley forecast for the three months to August by 29 per cent, but reduced 2008 by only 10 per cent saying the credit crunch was just a "speed bump". Others are less sanguine and believe the easy credit on which the banks have thrived may be gone for some time.
The worst performer over the past month has been Lehman Brothers whose shares are down 26 per cent. It has a big mortgage business and it disclosed that, at the end of May, it had contingent leveraged loan commitments of $43.9bn, the highest of all relative to its size apart from Goldman.
The amount that ends up on Lehman's balance sheet is likely to be much lower, but some bankers believe it could be higher. Given such uncertainties, sector share prices are likely to keep on swinging for a while.
Source: The Financial Times
Date: 17.08.2007 [ID: 77]