Goldman Sachs cuts estimates and target on Merrill Lynch (MER) after MER reported disappointing Q2 earnings yesterday:
The quarterly results were driven by write-downs of $9.7 bn, across asset classes but primarily on CDOs and related hedges with monolines. Exposure to risky assets remains Merrill’s largest challenge, and we expect this to remain a problem for the next few quarters, barring a substantial improvement in the operating environment.
Also, Goldman isn’t yet comfortable with Merrill’s capital position. It’s tier 1 ratio appears good on the face of things, but should conditions continue to deteriorate, more capital will be required and raising it will be costly:
We would prefer to see Merrill rid itself of these assets and clean up the balance sheet; however, this could bring about simultaneous capital needs that could be very costly for Merrill. Its current Tier-1 ratio of 9.5% (pro forma for the Bloomberg and FDS sales) indicates the firm is currently well capitalised, but in our view does not give it a substantial cushion to deplete its capital base without raising additional money, given current market conditions.
Goldman reiterates Neutral, cuts target from $38 to $33, and drops 2008 through 2010 estimates to ($8.85), $3.00, and $4.00 from ($3.55), $3.65, and $4.50 respectively.
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