U.S. bank shares sink after Oppenheimer cuts outlook

By Tenzin Pema

BANGALORE (Reuters) - Shares of top banks Citigroup (C.N: Quote, Profile, Research, Stock Buzz) and JPMorgan Chase (JPM.N: Quote, Profile, Research, Stock Buzz) fell 4 and 5 percent, respectively, after influential analyst Meredith Whitney slashed her earnings outlook for top U.S. banks and said the credit crisis is far from over.

The crisis will extend well into 2009 and perhaps beyond as large U.S. banks will likely incur more than $170 billion in reserve builds by the end of 2009 on top of regular loan-loss provisions, the Oppenheimer & Co analyst said.

"We believe the current credit crisis is far from over," Whitney said in a note dated May 19. "In fact, we believe what lies ahead will be worse than what is behind us."

Whitney became a Wall Street celebrity last year after she pointed to Citigroup's deepening credit losses and correctly predicted that the largest U.S. bank would cut its dividend and go on a capital-raising spree.

In her latest note, Whitney said she expects losses at the big banks to accelerate further and to be "far worse than even the most draconian estimates."

"Either in the form of write-downs or reserve builds, we believe the effect is the same: revenue reversal from years worth of inherently flawed underwriting," Whitney said.

The banks have written down more than $70 billion of losses related to real-estate securities since July, she said. They have also taken more than $25 billion in reserve builds related to on-balance-sheet loans, she added.

Whitney increased her 2008 loss forecast for Citigroup Inc and the next three largest U.S. banks, Bank of America Corp (BAC.N: Quote, Profile, Research, Stock Buzz), JPMorgan Chase & Co and Wachovia Corp (WB.N: Quote, Profile, Research, Stock Buzz). She lowered her second-quarter earnings views for Bank of America and JPMorgan but raised them slightly for Citigroup and Wachovia.  Continued...