London: Losses stemming from falling values of subprime mortgage assets may reach $300 billion to $400 billion worldwide, Deutsche Bank analysts said. Banks and brokers will be forced to write down as much as $130 billion because of the slump in subprime-related debt, based on a 'seat-of-the-pants' estimate the firms will account for a third of total mark downs, Mike Mayo, a New York-based analyst at the bank, wrote in a report today.
Banks may have to write off $60 billion to $70 billion this year, he wrote. The world's biggest banks and securities firms including Citigroup and Merrill Lynch have written down more than $40 billion of assets as mortgage-related bond prices slump on record US foreclosures. About $1.2 trillion of the $10 trillion of outstanding US mortgages are considered to be subprime, Mayo said in the note.
"We're not out of the woods yet,'' said Mondher Bettaieb- Loriot, who helps manage the equivalent of about $58 billion at Swisscanto Asset Management in Zurich. "There are more losses to be taken and there's more negative news to come. At some point it will be a buying opportunity but we're not there yet.'' Deutsche Bank expects 30 per cent to 40 per cent of subprime debt to default. Losses on loans to people with poor credit histories may be as much as half the sum lent, Mayo said.
The estimate for banks' and brokers' losses in 2007 is based on known charges of $43 billion and expected additional losses of $25 billion, Mayo said in the note. Loss rates on about $200 billion of securities based on derivatives linked to subprime debt will run as high as 80 per cent, according to the note.
Credit-default swaps on the iTraxx Financial Index of 25 European banks and insurance companies increased two basis points to 55 basis points. The benchmark reached a record 60 basis points on August 16 when US mortgage lender Countrywide Financial drew on emergency funding to stay afloat. The index rises when perceptions of credit quality worsen.