Goldman Sachs, the world's biggest securities firm and perhaps, the best financial forecaster, considering that it came out of the sub-prime mortgage crisis relatively unscathed, has come out with new predictions on a possible end to the current financial turmoil and actions expected of banks to turn around.

According to the report, compiled by analysts led by Richard Ramsden, as many as nine months may pass before the banking sector sees a recovery, and that too is conditional on certain conditions being satisfied. Additionally, American banks may need to raise $65 billion of additional capital to cope with mounting losses, on top of the $120 billion already raised by the industry.

The sector is only likely to rebound broadly when credit costs have stabilized, banks complete a process of recapitalization, consensus estimate ranges for earnings narrow and the yield curve steepens, Goldman Sachs analysts wrote in the report, which it based on looking at past credit cycles.

In other words, the worst is far from over, although the end may be in sight. Goldman Sachs estimates credit losses resulting from continued deterioration in the mortgage and lending markets will not peak until early 2009, making a broad-based rally in the sector unlikely before the end of 2008. Goldman Sachs estimates peak losses will occur during the first quarter of 2009, with charge-off ratios reaching, on average, 1.39 per cent.

"Banks will not turn until a peak in credit costs is in sight," the analysts wrote. "Moreover, weaker banks are unlikely to benefit from consolidation as bank deals always slow when credit is deteriorating and larger banks are hamstrung by their own problem assets as well as accounting requirements."

Goldman said it lowered its price targets for 14 banking companies and cut its 2008 earnings-per-share forecasts for 11. Among 21 banks it covers in the space, Goldman Sachs, on average, cut 2008 estimates by 9 per cent, 2009 estimates by 4 per cent and 2010 estimates by 2 per cent to account for greater credit losses

Among the institutions for which both estimates have been downgraded are BB&T Corp PNC Financial Services Group Inc, SunTrust Banks Inc, US Bancorp and Wells Fargo & Co. Goldman also lowered its price targets for Wachovia Corp and Washington Mutual Inc, and its earnings outlook for Bank of America Corp.

The variations in future earnings estimates means there is no agreement where earnings or book value of banks will stabilize during the credit downturn, according to the report.

"We watch for a tightening of the consensus range, which is at record highs," Goldman Sachs said in the report. "When the range tightens, it will signal confidence in where book values stabilize."

The report estimated that banks and thrifts have set aside $86 billion for loan losses in the three quarters since the credit crisis began.

They said the weak housing market drove the deterioration and that home prices will likely keep falling all year. It expects credit losses to peak in the first quarter of 2009, when the rate of charge-offs may be 46 per cent higher than a year earlier.

The analysts also said that the future round of fund-raising might find it harder to succeed. Earlier, most of the capital raised has come from offerings of common stock or convertible preferred shares.

"Capital raising becomes harder," the analysts wrote. "Only four out of 42 deals we track are in-the-money so far. This will make the next round of deals harder and more expensive."