Oct. 5 (Bloomberg) -- JPMorgan Chase & Co. and Bank of America Corp., the biggest arrangers of U.S. leveraged loans, may write down the value of their holdings by a combined $3 billion in the third quarter after surging mortgage defaults halted credit markets, analysts at Sanford C. Bernstein & Co. said.

JPMorgan may have to write down holdings by about $2 billion, and Bank of America's markdown may be about $1 billion, Bernstein analysts Howard Mason and Michael Howard wrote in a note to investors today. Bank of America, the nation's second- largest bank, and JPMorgan, the third biggest, shared 30 percent of the market for U.S. leveraged buyouts this year, according to data compiled by Bloomberg.

Rising defaults on subprime loans to the riskiest borrowers in the U.S. have roiled financial markets in the past three months, leaving banks with losses on mortgages and a backlog of about $370 billion in loans to fund buyouts. Merrill Lynch & Co., the world's largest brokerage, today reported its first quarterly loss in six years and said the outlook for the rest of 2007 remains unclear amid ``continued challenges'' in credit markets.

Capital markets-related losses ``will tend to fall into three buckets: negative marks on leveraged lending, negative marks on warehouse loans including subprime and losses in credit- trading,'' wrote the Bernstein analysts, who have ``market perform'' ratings on Bank of America and JPMorgan.

Citigroup Forecast

JPMorgan gained 33 cents to $47.58 at 4:01 p.m. in New York Stock Exchange trading. The shares have declined 1.5 percent this year, compared with a 6 percent decline in the 24-member KBW Bank Index. Bank of America, which has declined 1.3 percent this year, rose 31 cents to $52.71.

Citigroup Chief Executive Officer Chuck Prince said on Oct. 1 that earnings will return to ``normal'' in the fourth quarter after the New York-based company reported it would take $5.9 billion in credit and trading losses on loans and mortgage-backed securities in the third quarter.

``The stock market is at an all-time high, which is telling us that the outlook remains better than some had forecast,'' said Gary Townsend, an analyst at Friedman, Billings, Ramsey & Co. in Arlington, Virginia. ``We haven't changed our fourth-quarter numbers and so far the news has been encouraging, based on what we heard from Chuck Prince.''

Friedman Billings has an ``outperform'' rating on Bank of America and doesn't rate JPMorgan.

Merrill's Writedowns

Bernstein didn't change its fourth-quarter earnings estimates for the two banks, and reduced its 2008 earnings per share outlook for Charlotte, North Carolina-based Bank of America by 2.8 percent. Both banks are scheduled to release their third- quarter results later this month.

Merrill said today it will report a third-quarter loss of as much as 50 cents a share because of writedowns on LBO loans and debt securities. Merrill is the second Wall Street firm after Switzerland's UBS AG to disclose a quarterly loss because of the market shakeout. Only Citigroup, the largest U.S. bank, has reported a bigger credit loss, though it still expects a profit.

JPMorgan, based in New York, may mark down loans it made to finance leveraged buyouts by about $1.4 billion, the same as Citigroup, the Bernstein analysts said. The bank may say the value of mortgages and other debt it is waiting to parcel out fell by $700 million, the analysts said.

Bank of America may report a $700 million decline in the value of leveraged loan commitments and a $300 million decline in debt it is waiting to resell, the analysts said.

Boost Reserves

Unlike Citigroup, JPMorgan and Bank of America aren't likely to substantially boost their reserves for potential losses on credit cards and other consumer loans, the Bernstein analysts said. Citigroup increased its reserves by $2 billion, compared with expected build-ups of $200 million at JPMorgan and $100 million at Bank of America, the analysts said.

``At least so far Bank of America has said their consumer credit quality is holding up reasonably well,'' Townsend said. ``There are differences in underwriting standards at different banks.''

Citigroup Chief Financial Officer Gary Crittenden is conducting a detailed review that is prompting reserve increases independent of the credit environment, Mason said in an e-mail. ``In contrast we believe JPMorgan and Bank of America need reserve-up only to the extent the credit environment has deteriorated,'' he said.

Neither JPMorgan nor Bank of America will report credit- trading losses, the analysts wrote. Bernstein rates the two banks ``market perform.''

Earnings Projection

JPMorgan may report earnings per share of 95 cents, less than analysts' consensus of 98 cents, and Bank of America may miss analysts' expectations with earnings per share of $1.05. The consensus forecast is $1.10, the analysts wrote.

Bank of America CFO Joe Price said on Sept. 17 that ``unprecedented dislocations in credit markets will have a ``meaningful impact'' on third-quarter results. The bank, which will report its earnings Oct. 18, won't comment further, spokesman Scott Silvestri said. JPMorgan spokesman Brian Marchiony declined to comment.

To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net.

Last Updated: October 5, 2007 16:33 EDT