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By Mike Caggeso
Oppenheimer & Co. (OPY) analyst Meredith Whitney has slashed first-quarter earnings outlooks for the four largest U.S. banks - Bank of America Corp (BAC), JPMorgan Chase & Co. (JPM), Wachovia Corp. (WB) and Citigroup Inc. (C).
Whitney said in a report that there is "no clear end in sight" for the troubles plaguing the financial industry, saying she anticipates "the current credit cycle to be the worst in generations," Reuters reported.
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In October, she correctly predicted that Citigroup would cut its dividend and raise $30 billion in capital.
This time, she said that Citigroup stands to lose as much as $1.15 a share in the first quarter, more than four times her original forecast loss of 28 cents per share. For the year, she expects the bank to lose 15 cents a share after seeing a 75-cent-per-share profit earlier in the year.
Investors in the other banks will see profits, but not as much as Whitney originally predicted. Bank of America investors will see 35 cents per share profit (down from 92 cents); JPMorgan will earn 70 cents per share (down from 86 cents); and Wachovia will take home 55 cents per share (down from 78 cents), Whitney wrote.
She also cut her 2008 profit per share forecasts for the banks: $3.25 from $3.65 for Bank of America; $2.90 from $3.20 for JPMorgan, and to $2.70 from $3.05 for Wachovia.
"Despite cutting estimates for financials by over 30 times since November, we are confident this will not be our last reduction in 2008," Whitney wrote. "As key mark-to-market indices trend lower, the housing market worsens, and the U.S. consumer comes under increasing pressure, we anticipate further downside to both estimates and stock prices."
Much of these reductions will stem from billions more in first-quarter writedowns.
Whitney expects Citigroup to write down $13.12 billion in the first quarter, with as much as $9 billion of that stemming from collateralized debt obligations (CDOs), which Money Morning Contributing Editor Martin Hutchinson says are responsible for much of the current credit crisis.
Also, Bank of America could write down as much as $4.29 billion in the first quarter. JPMorgan could suffer $2.83 billion in write-downs. And Wachovia could face up to $1.53 billion in write-downs, Whitney said.
JPMorgan might suffer $2.83 billion of write-downs, with nearly half resulting from leveraged loans, while Wachovia faces a possible $1.53 billion of write-downs, with about half tied to commercial mortgages, she said.
Citigroup: Still a Turnaround Play?
This shouldn't rattle long-term investors, as some of the world's savviest investors have pumped billions into Citigroup in the last few months - speculating that the beleaguered company is near its bottom.
Citigroup has already received cash infusions totaling $30 billion from a variety of sovereign wealth funds including Abu Dhabi, Kuwait, Singapore and Saudi Prince Alwaleed bin Talal.
You many remember Prince Alwaleed from the early 1990s, when he bailed out then-downtrodden Citigroup with a $600 million investment. It turned the company around and pocketed him $1 billion in the process.
These investors of course don't like to hear reports such as Whitney's, which sent Citigroup's shares down $1.35 to $22.07, but they aren't in it to make a quick profit.
Money Morning Investment Director Keith Fitz-Gerald warned in November that Citigroup might suffer downgrades such as Whitney's.
"Any of these things will take a while to work through the system, and Citi's share price will be volatile," Fitz-Gerald said. "But the company remains globally diversified, and many portions of its business still reflect double-digit growth rates, particularly when it comes to China and Eastern Europe. That's something that most investors in their rush to judgment don't properly understand."
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