Monday, 1 October 2007

Banks slash 3Q07 earnings forecasts

My last post turned out to be timely. A few major banks have come out with some drastic 3Q07 profit warnings. From

Big write-downs to slash Citi's quarterly profit 60%
Citigroup Inc (C) said Monday it expects third-quarter profit to fall 60% from last year after huge write-downs for unsold debt it issued to finance corporate takeovers and big losses on the value of subprime mortgage-backed securities.

Citi sees a write-down of $1.4 billion pretax, net of underwriting fees, on funded and unfunded loans for clients doing leveraged buyouts. (LBOs)

It said it expects losses of $1.3 billion pretax, net of hedges, on the value of subprime mortgage-backed securities warehoused for certain securitizations, and $600 million pretax in fixed-income credit trading due to significant market volatility and the disruption of historical pricing relationships.

Remember last quarter when UBS said that if the downturn in credit and equity markets continued into the third quarter they would likely report a drop in second-half profit? Well guess what:

UBS to report large loss from fixed-income unit

SAN FRANCISCO (MarketWatch) -- UBS AG is expected to report on Monday a large loss from its fixed-income unit for the third quarter, according to a published report.

A story in the online edition of the Wall Street Journal citing people familiar with the matter reported UBS (UBS) is forecasting a third-quarter loss of swiss francs 600 million to swiss francs 700 million ($602 million) based on a write-down of swiss francs 3 billion to swiss francs 4 billion for fixed income assets.

The bank is reporting the fixed-income loss ahead of its third-quarter results which are due Oct. 30. The bank in August told investors that the third quarter would be difficult if credit markets continued to struggle, the report notes.

According to the Jounral, sources said the losses resulted from applying sharply lower market values to asset-backed bonds, after the Swiss bank took a conservative view of where these securities will be trading for the near term.
None of this is surprising to those who have been following events. We are at the beginning of the end for record bank profits in the current earnings cycle. Will the markets have the foresight to see it or will they continue to view it as a one quarter event until reality hits home? Recent market action suggests the latter.