Shares fall globally on new fears for banks

Fears that banks could still be feeling the impact of the credit squeeze by Christmas next year drove down shares globally on Monday after Goldman Sachs predicted a further $48bn of writedowns by the end of 2008.

The report of its three leading banking analysts – the trio who foreshadowed Merrill Lynch’s writedowns last month – helped prompt large falls on stock markets on both sides of the Atlantic, taking European indices to their lowest point since August.

he FTSE Eurofirst 300 index fell 2.1 per cent while in London the FTSE 100 index declined 2.7 per cent – both lower than their starting point for the year. In the US, the S&P 500 closed down 1.75 per cent, its lowest level since mid-August.

Banks’ cashflow concerns are also continuing to push up money market rates. Two and three-month dollar and sterling rates reached their highest levels in two months amid growing concerns about Northern Rock – the troubled UK lender – and that other financial institutions would face a tough time securing funding for their balance sheets at the end of December, when their financial year also ends.

A sense that the US Federal Reserve would be forced to ease policy again in December to relieve the stress on the banks took the yield on the two-year Treasury note down 13.5 basis points to 3.20 per cent.

The Goldman note exacerbated jitters in European markets already unnerved by the announcement from Swiss Re, the world’s biggest reinsurer, of a SFr1.2bn ($1.08bn) writedown of securities linked to subprime mortgages.

Goldman’s list of projected writedowns was headed by Citigroup, with a forecast $22bn write-off, split between $11bn in the fourth quarter of 2007 and the rest in 2008. This month, Citi said it expected to write down between $8bn and $11bn for the fourth quarter. The note brought Citi’s shares down 5.9 per cent, taking its loss for the year to more than 42 per cent.

Goldman also expects writedowns of $13bn for Merrill Lynch and $8bn at Morgan Stanley, shared over the final quarter of 2007 and 2008.

Goldman said: “Our incrementally more negative view on the sector should have the most pronounced impact on Citigroup.

“This firm lacks leadership at the present time and has a disproportionate amount of exposure to subprime mortgages and collateral debt obligations.’’

The firm cut its 12-month price target on Citi to $33.

Among European banks, UBS could yet have the biggest writedowns, according to CreditSights, an independent research house.

The firm believes UBS could have more than $9bn in further CDO writedowns to bear, which would amount to more than 70 per cent of its pre-tax profit last year. Dresdner Bank and WestLB could also end the year with writedowns that exceed 50 per cent of their prior year’s profits.