Fitch Ratings expects the large U.S. investment banks will face a challenging environment in the coming quarters, as profit opportunities remain squeezed. And the ratings agency worries that it may prove tougher to raise further capital.
Following the review, the firm has placed its long-term Issuer Default Ratings of Merrill Lynch on ‘rating watch negative’, while also affirming the ratings of three other banks.
The rating agency said that it anticipates a fourth consecutive quarterly loss in the second quarter for Merrill, due to ongoing write-downs, largely related to residential mortgage, monoline and ABS-CDO positions. At the end of the first quarter, Merrill’s exposure to these and other higher risk assets as a percent of capital was significant relative to peers, Fitch said.
“This rating action results in part from diminished expectations that Merrill’s fixed income, currency and commodities operations will attain a sustainable level of core profitability in the near-term. Losses in this segment of the investment bank underpin the recent quarterly losses, and could continue to overwhelm income contributions from other business segments,” it explained. “In addition, the current environment limits the volume and scope of many traditional investment banking opportunities. These reduced revenue opportunities, coupled with Merrill’s ongoing negative mark-to-market adjustments, significantly constrain the company’s earnings prospects.”
Fitch also notes that Merrill has maintained capital adequacy via numerous issuances over the past nine months. But it believes the investor base may be becoming saturated and financial flexibility may be more limited in the future. “Satisfying additional capital needs with more equity or unsecured term debt may prove costly,” it warns.
“Alternatively, monetizing its Blackrock and/or Bloomberg investments could generate incremental capital. Other asset sales to shrink the balance sheet would lower capital needs and generate cash, although current market conditions may limit attractive sales opportunities,” it adds.
In addition, Fitch affirmed the ratings of Morgan Stanley and Lehman Brothers Holdings Inc., although the ratings outlook for those firms remains negative, as the profit, and capital raising, outlook for investment banks remains weak for coming quarters.
However, Fitch affirmed its ratings of Goldman Sachs with a stable outlook. “Goldman prudently manages its balance sheet, and continues to exhibit strong liquidity management throughout the currently stressed environment. Goldman has been profitable, maintains its lead positions in global advisory, equity underwriting, and prime brokerage,” it notes.
“Goldman effectively limited its exposure to subprime mortgages and related derivative instruments. In doing so, it has avoided the most severe valuation losses incurred by many other participants in the securitized mortgage arena,” it adds. Moreover, it notes that Goldman has demonstrated agility in navigating the current environment, and in some instances, taking advantage of dynamic market conditions profitably.
Fitch may cut Merrill Lynch debt rating
Affirms ratings on three other big Wall Street investment banks
- By: IE Staff
- July 9, 2008 July 9, 2008
- 10:55