Merrill Lynch targeted by earnings downgrades

By Kevin Plumberg

NEW YORK (Reuters) - The embattled financial sector took another hit on Tuesday as JPMorgan Chase and UBS AG cut their earnings forecasts for Merrill Lynch & Co Inc (MER.N: Quote, Profile, Research) and said they expect the Wall Street firm to disclose more write-downs.

In turn, Merrill downgraded regional banks Bank of America (BAC.N: Quote, Profile, Research), PNC Financial (PNC.N: Quote, Profile, Research) and SunTrust Banks Inc (STI.N: Quote, Profile, Research), saying the bursting of the housing bubble will continue to hurt lending and home equity.

The sharply lowered earnings expectations for Merrill stood out, though, dashing whatever confidence had been restored last week after the Federal Reserve helped arrange for JPMorgan (JPM.N: Quote, Profile, Research) to take over Bear Stearns Cos Inc BSC.N, avoiding a systemic meltdown among banks.

"In our view, Merrill Lynch is overexposed to the credit markets, which have been challenging, especially in the areas where Merrill has been most active," JPMorgan analysts Kenneth Worthington and Funda Akarsu wrote in a note.

Merrill shares were down 2 percent to $47.27 near midday, and the banking sector was the biggest drag on the Dow Jones industrial average.

JPMorgan forecast Merrill would write down an additional $2.1 billion of subprime debt, leading to a loss in the first quarter.

Merrill had $24.4 billion of mortgage-related write-downs in 2007, among the most on Wall Street, according to a Reuters tally.

The earnings forecasts for Merrill and the increasingly negative views on banks are a reminder that the financial sector's troubles as a result of the crisis of confidence in lending markets are far from over, even after JPMorgan on Monday quintupled its offer for Bear Stearns to $10 a share.