Wall St braced for subprime collateral damage
Wall St braced for subprime collateral damage
By Ben White in New York
Copyright The Financial Times Limited 2007
Published: March 12 2007 19:16 | Last updated: March 12 2007 19:16
The rapid decline of subprime lender New Century Financial has added a new sense of urgency to first quarter earnings reports due this week from Wall Street investment banks Lehman Brothers, Bear Stearns and Goldman Sachs.
While first quarter profits from all three are expected to be up from last year, analysts and investors will be listening intently for any comments from executives about the potential future impact on profits from the dramatic meltdown at New Century and across the subprime mortgage market.
Investment banks over the last several years have become among the biggest buyers of subprime loans and sellers of high-yielding securities backed by those loans. Lehman, Bear Stearns, Morgan Stanley and Merrill Lynch also increasingly originate subprime loans themselves and retain some residual interest in those loans even after they have sold them on to investors.
Analysts will be looking for clarification on the precise extent of retained interest, especially in relatively opaque collateralized debt obligations (CDOs), which are packages of mortgage-backed and other securities that include various levels of risk.
In addition, Morgan Stanley last year paid $706m for subprime lender Saxon Capital and Merrill Lynch bought the First Franklin subprime unit from National City Corp for $1.3bn. Some analysts suggest both prices were too high and say the banks may have to write down the value of the assets due to declines in demand for mortgage backed securities and CDOs.
Many commercial and investment banks have also been major lenders to New Century, providing it with the capital to continue to make loans. New Century on Monday said it had $8.4bn in loan arrangements outstanding with its creditors.
Morgan Stanley has among the biggest current exposure at $2.5bn, according to New Century in its filing to the Security and Exchange Commission on Monday. That loan is collateralized by mortgages held by New Century. Morgan Stanley and other lenders could force New Century to liquidate its loan portfolio in order to repay borrowings. However, New Century said on Monday that forced liquidation may not generate enough cash to repay lenders.
The last figures available to the end of September 2006 for other New Century creditors reveals that UBS has obligations of $1.5bn, Bank of America $1.3bn, Barclays $217m, Bear Stearns $636m, Credit Suisse $546m and Deutsche Bank $583m.
So far, the banks have said they see limited overall impact from the subprime turmoil, which has seen high-risk borrowers default as loans granted at low “teaser” interest rates are revertin to higher rates.
Despite upbeat comments from Wall Street executives, analysts say the impact to future earnings could be significant, especially if problems spread to prime mortgages and other areas of the credit markets and create increased risk aversion.
If problems remain contained, Bear Stearns and Lehman could see around a 1 per cent decline in 2007 net income due to reduced MBS trading volumes, calculates Brad Hintz, an analyst at Sanford Bernstein.
If the problems spread, however, and create a credit crunch similar to the 1998 crisis, Goldman, Lehman and Bear Stearns could see annual pretax income fall by close to 20 per cent, while Morgan Stanley and Merrill’s profits could drop 10 per cent.
So far such a scenario seems unlikely. Lauren Smith, analyst at Keefe, Bruyette Woods, expects comments from senior banking executives this week - starting with Goldman on Tuesday - should “help temper fears of a looming credit crisis”.
Those fears have weighed on brokerage shares and increased the cost of protection against default on the brokers’ bonds.
But analyst anticipate profits from stronger trading and investment banking revenues will more than offset any losses from the subprime market.
Ms Smith recently increased her earnings outlook for Goldman to $4.80 per share and Morgan Stanley to $1.82 per share She left estimates unchanged for Bear Stearns at $3.80 per share and Lehman at $1.91. Ms Smith also noted that Goldman’s first quarter ended Feb. 23, before the sharp market sell-off of February 27.
By Ben White in New York
Copyright The Financial Times Limited 2007
Published: March 12 2007 19:16 | Last updated: March 12 2007 19:16
The rapid decline of subprime lender New Century Financial has added a new sense of urgency to first quarter earnings reports due this week from Wall Street investment banks Lehman Brothers, Bear Stearns and Goldman Sachs.
While first quarter profits from all three are expected to be up from last year, analysts and investors will be listening intently for any comments from executives about the potential future impact on profits from the dramatic meltdown at New Century and across the subprime mortgage market.
Investment banks over the last several years have become among the biggest buyers of subprime loans and sellers of high-yielding securities backed by those loans. Lehman, Bear Stearns, Morgan Stanley and Merrill Lynch also increasingly originate subprime loans themselves and retain some residual interest in those loans even after they have sold them on to investors.
Analysts will be looking for clarification on the precise extent of retained interest, especially in relatively opaque collateralized debt obligations (CDOs), which are packages of mortgage-backed and other securities that include various levels of risk.
In addition, Morgan Stanley last year paid $706m for subprime lender Saxon Capital and Merrill Lynch bought the First Franklin subprime unit from National City Corp for $1.3bn. Some analysts suggest both prices were too high and say the banks may have to write down the value of the assets due to declines in demand for mortgage backed securities and CDOs.
Many commercial and investment banks have also been major lenders to New Century, providing it with the capital to continue to make loans. New Century on Monday said it had $8.4bn in loan arrangements outstanding with its creditors.
Morgan Stanley has among the biggest current exposure at $2.5bn, according to New Century in its filing to the Security and Exchange Commission on Monday. That loan is collateralized by mortgages held by New Century. Morgan Stanley and other lenders could force New Century to liquidate its loan portfolio in order to repay borrowings. However, New Century said on Monday that forced liquidation may not generate enough cash to repay lenders.
The last figures available to the end of September 2006 for other New Century creditors reveals that UBS has obligations of $1.5bn, Bank of America $1.3bn, Barclays $217m, Bear Stearns $636m, Credit Suisse $546m and Deutsche Bank $583m.
So far, the banks have said they see limited overall impact from the subprime turmoil, which has seen high-risk borrowers default as loans granted at low “teaser” interest rates are revertin to higher rates.
Despite upbeat comments from Wall Street executives, analysts say the impact to future earnings could be significant, especially if problems spread to prime mortgages and other areas of the credit markets and create increased risk aversion.
If problems remain contained, Bear Stearns and Lehman could see around a 1 per cent decline in 2007 net income due to reduced MBS trading volumes, calculates Brad Hintz, an analyst at Sanford Bernstein.
If the problems spread, however, and create a credit crunch similar to the 1998 crisis, Goldman, Lehman and Bear Stearns could see annual pretax income fall by close to 20 per cent, while Morgan Stanley and Merrill’s profits could drop 10 per cent.
So far such a scenario seems unlikely. Lauren Smith, analyst at Keefe, Bruyette Woods, expects comments from senior banking executives this week - starting with Goldman on Tuesday - should “help temper fears of a looming credit crisis”.
Those fears have weighed on brokerage shares and increased the cost of protection against default on the brokers’ bonds.
But analyst anticipate profits from stronger trading and investment banking revenues will more than offset any losses from the subprime market.
Ms Smith recently increased her earnings outlook for Goldman to $4.80 per share and Morgan Stanley to $1.82 per share She left estimates unchanged for Bear Stearns at $3.80 per share and Lehman at $1.91. Ms Smith also noted that Goldman’s first quarter ended Feb. 23, before the sharp market sell-off of February 27.
posted by Carlos T Mock at 11:08 AM
0 Comments:
Post a Comment
<< Home