Plus: Citigroup downgrades some homebuilders and UBS cuts its opinion on Fannie Mae and Freddie Mac
From Standard & Poor's Equity ResearchHSBC Holdings (HBC) moves lower after Goldman Sachs downgrades the stock to sell from neutral. Analyst Roy Ramos says Household (HI) net profit/loss severity problem continues to grow, and is now extending into the branch home equity and non-property loan books. He expects some 56% of HI's home loans to go into negative equity as property prices fall.
Ramos calculates that HSBC will need to take $12 billion more in subprime provisions, on top of the $4 billion taken in the fourth quarter of 2006 through the third quarter of 2007, but in a drawn-out way. He expects HI's net losses to more than double year-over-year to $1.8 billion.
The analyst lowers his 2007 EPS estimate for HSBC by 7.7% to HK$12.30, 2008's by 13.8% to HK$10.68, and 2009's by 8.5% to HK$12.69.
CITIGROUP DOWNGRADES HOMEBUILDERS
Citigroup analyst Stephen Kim downgrades Meritage Homes (MTH) to sell from hold. He also downgrades Standard Pacific (SPF), Ryland Group (RYL), Pulte Homes (PHM), Lennar (LEN), KB Home (KBH), D.R. Horton (DHI) and Centex (CTX) to hold from buy.
Kim says that while he still believes long-term investors will do well owning homebuilders over the next few years, the current overhang of resale inventory and subprime rate resets appear to make historical trading and valuation analyses of limited utility for predicting near-term performance in the group.
He notes it's difficult timing the bottom because the housing cycle's downturn has not coincided with the economic cycle, and the downturn in the existing home market is lagging far behind the new home market. He does not expect there to be sufficient data to allow for optimism until the second quarter of 2008.
UBS FINANCIAL DOWNGRADES FANNIE MAE AND FREDDIE MAC TO NEUTRAL FROM BUY
Fannie Mae (FNM) and Freddie Mac (FRE) fall after UBS Financial downgrades both stocks to neutral from buy. UBS analyst Eric Wasserstrom says the downgrades are based on his outlook for EPS compression, deriving primarily from credit pressures; the likelihood of further book value (BV) and/or fair value of net assets (FVNA) erosion, particularly at Freddie Mac; and the likelihood that BV/FVNA multiples remain compressed in the medium term.
Wasserstrom notes although the GSEs may be relieved from their 30% capital surcharges in 2008, that will not mitigate immediate term pressures, especially at Freddie Mac. He says Fannie Mae's challenge will be building reserve levels, while at Freddie Mac the challenge is rebuilding capital levels.
He has a $31 target for FNM and $28 for FRE, which reflect lower FVNA multiples.