Bad credit mars Wall St bankers' summer break

WASHINGTON - JULY is usually a quieter month for busy Wall Street bankers, spent lounging poolside at the Hamptons or on a Caribbean beach, but a nagging credit crunch has cast a dark cloud over such vacations.

Major US banks, including Citigroup, Bank of America, JPMorgan Chase and Merrill Lynch, are due to unveil their second quarter earnings in coming weeks, and analysts say some results will not be pretty.

America's finance houses are weathering one of the worst market downturns in decades as a two-year long housing market slump and a credit squeeze, which erupted last summer, continue to roil balance sheets.

Some bankers believed at the start of the year that Wall Street would ride out the credit storm by the summer, but such predictions have proved premature.

Lehman Brothers announced a net loss of US$2.8 billion (S$3.81 billion) for its fiscal second quarter on June 16, and America's seventh largest savings and loan bank, IndyMac Bancorp, said on Monday it was struggling to raise fresh capital while announcing some 3,800 job cuts.

'It's tough to say exactly when things are going to turn, it really comes down to when the broader economy and the housing markets start to stabilise. When that happens, the operating environment for the banks will start to get a little bit better,' said Mr Ryan Lentell, a senior equity analyst at Morningstar.

Banking analysts at Goldman Sachs expect Citigroup and Merrill Lynch to unveil further quarterly losses this month. Merrill is due to post its earnings on July 17 followed by Citigroup, one of America's biggest financial institutions, a day later.

Media reports have suggested Merrill may sell its respective stakes in the BlackRock investment firm and Bloomberg, the financial information group, to raise fresh funds to help shore up its balance sheet.

A Merrill spokesperson declined to comment on the rumours.

Merrill posted a first quarter loss of almost two billion dollars, but it is still chasing deals. It reached an accord last month to acquire the Chilean brokerage firm Ureta y Bianchi for an undisclosed sum.

Some firms are riding out the credit squeeze, which has forced banks to tighten lending as they seek to stem losses tied to ailing mortgage investments, relatively well.

Goldman Sachs reported an 11 per cent slide in its latest quarterly earnings on June US$17 billion to US$2.1 billion, but its earnings were better-than-expected and were looked on with envy by rivals.

Analysts say JPMorgan Chase, which took over the ailing investment bank Bear Stearns in March, has also escaped the credit crunch relatively unscathed.

JPMorgan Chase is due to unveil its results on July 17.

Aside from mortgage losses, the credit woes have also been fuelled by a sharp downturn in corporate mergers and acquisitions, and initial public offerings (IPOs), from which investment banks reap fat fees.

A hefty slide in US stock markets, the leading Dow Jones Industrial Average has tumbled over 14 per cent so far this year, has meanwhile dented profits from share trading.

And analysts say they are now seeing evidence that banks are being pinched by delinquent home equity and car loans, suggesting some consumers are buckling from the economic slowdown.

The credit storm has been reflected in bank stock prices.

Citigroup's stock had slumped 40 per cent from the start of the year to US$17.39 on Tuesday while Merrill's stock has tumbled 38 per cent to 32.77.

Top regulators have signalled they are keeping a close eye on the health of America's biggest banks.

'The financial turmoil is ongoing, and our efforts today are concentrated on helping the financial system return to more normal functioning,' Federal Reserve chairman Mr Ben Bernanke told a forum this week.

Mr Bernanke spoke a day after the central bank and the Securities and Exchange Commission announced they had agreed to deepen ties to better monitor cash-strapped banks.

The credit squeeze has triggered wider global repercussions and European bankers will also take subdued holidays this summer.

Two large Swiss banks, UBS and Credit Suisse, have posted billions of dollars in losses tied to soured US mortgage bets, and a British bank, Bradford & Bingley, has seen its shares hammered as it vies to right its stricken finances. -- AFP


Popular posts from this blog

Do you want to get into Goldman Sachs?

Warren Buffett’s favorite market metric suggests investors are ‘playing with fire’