Oppenheimer is out with a fairly major call saying they believe the next near term issue of focus for financial investors will be actual loan loss exposures, reserves, necessary provisioning, and subsequent earnings power. Firm is cutting their FY2008 and FY2009 estimates on the large cap banks by an average of 29% and 13%, respectively, based upon their updated accelerated loss curve assumptions as well as estimates for 1st quarter write- downs for leveraged loans.
The most drastic cut is aimed at Citigroup (NYSE:C):
- Opco is lowering otheir 2008 estimate to $0.75 from $2.70, although they believe their revised estimates could still prove optimistic. As C's balance sheet is highly constrained from both an inability to sell lower quality assets due to illiquid markets as well as more assets coming back on its balance sheet due to illiquid markets, the firm continues to believe C will explore every option to sell assets. They continue to believe C will need to sell up to $100 billion in assets. They also continue to argue that under duress, C will likely be forced to sell what it can and not what it should. C will likely only be able to sell its better earning assets for any type of positive return. This, on top of the above mentioned earnings headwinds, will create an intensely challenging earnings year for the company.
Firm believes C shares could fall to levels during the last credit cycle of 1990/1991 or to .7X a share, or below $16 per share, or 36% below current levels. Note, they estimate tangible book value at just over $10 per share.
As they argue in our larger companion piece also published today, firm believes loss rate acceleration is currently grossly underestimated by consensus estimates. Reits Underperform on C.
Notablecalls: The only question is - is it Actionable?
Under "normal" circumstances I would be calling it an outright short. But now there's this ABK situation that complicates things. If we have positive deal news from ABK this morning, all the major banks will go up big time.
So, this one does not come w/o risk.
The most drastic cut is aimed at Citigroup (NYSE:C):
- Opco is lowering otheir 2008 estimate to $0.75 from $2.70, although they believe their revised estimates could still prove optimistic. As C's balance sheet is highly constrained from both an inability to sell lower quality assets due to illiquid markets as well as more assets coming back on its balance sheet due to illiquid markets, the firm continues to believe C will explore every option to sell assets. They continue to believe C will need to sell up to $100 billion in assets. They also continue to argue that under duress, C will likely be forced to sell what it can and not what it should. C will likely only be able to sell its better earning assets for any type of positive return. This, on top of the above mentioned earnings headwinds, will create an intensely challenging earnings year for the company.
Firm believes C shares could fall to levels during the last credit cycle of 1990/1991 or to .7X a share, or below $16 per share, or 36% below current levels. Note, they estimate tangible book value at just over $10 per share.
As they argue in our larger companion piece also published today, firm believes loss rate acceleration is currently grossly underestimated by consensus estimates. Reits Underperform on C.
Notablecalls: The only question is - is it Actionable?
Under "normal" circumstances I would be calling it an outright short. But now there's this ABK situation that complicates things. If we have positive deal news from ABK this morning, all the major banks will go up big time.
So, this one does not come w/o risk.
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