Tuesday, 28 August 2007

Merrill downgrades some of the big names

Just last Friday Merrill Lynch downgraded a raft of mid-cap banks and I pondered whether this would be the beginning of a downgrade deluge. Today Merril announced that they have downgraded some of the bigger name brokers:

Citi, Lehman Brothers, Bear Stearns downgraded at Merrill

LONDON (MarketWatch) -- Merrill Lynch downgraded Citigroup Inc. (C) , Lehman Brothers Holdings (LEH) and Bear Stearns Cos. (BSC) to neutral from buy. The broker said Bear Stearns and Lehman have a greater dependence on the debt markets than other firms and earnings are therefore likely to suffer from a slowdown in securitization and mortgage business. Merrill cut its 2008 earnings forecast for Lehman by 22% to $6.80 a share and for Bear Stearns by 16% to $12.07 a share. Merrill cut its earnings estimate for Citigroup by 5% to $4.91 a share, saying the group's broader business mix meant the earnings shortfall should be less dramatic than at Bear Stearns and Lehman. "But given the risks, we feel the need to be more selective," Merrill said. Merrill added its top picks in the sector are Goldman Sachs (GS) and Morgan Stanley (MS) because of their business mix and geographical diversity.

That's some fairly hefty downgrades for Lehman and Bear. The longer the turmoil in credit markets plays out the more it will hit earnings of the big fixed interest players such as Bear and Lehman.

Merrill's are clearly in front of the curve with respect to the downgrade process however at this stage it's still tough to forecast earnings more than a year out considering what's going on in credit markets at the moment.

So expect more tweaking of numbers from Merrill and expect more brokers to jump on the downgrade bandwagon - particularly after we get a look at 3Q07 earnings.