THE RATINGS GAME: Bigger Loan Losses Will Hurt Banks In 2009, Deutsche Bank Says
January 05 2009 - 12:42PM
Dow Jones News
By Sam Mamudi
NEW YORK (Dow Jones) -- Banking stocks traded lower Monday,
retreating as Deutsche Bank analysts cut their profit outlook and
warned that trouble is likely to spread to more types of loans this
year as the economy worsens.
The outlook for the banking sector should become even gloomier
still, according to Deutsche Bank, which published a note
suggesting that commercial banks' loan losses could surpass the
3.4% peak reached in 1934, during the Great Depression.
And even if losses don't reach to quite these levels, the
analysts expect them to double from the 1.5% seen in the third
quarter of 2008 to about 3% by the end of 2010.
"Reasons include an increased percentage of loans with higher
losses (construction, credit cards, home equity), greater consumer
leverage, and sooner problem recognition by banks," wrote lead
analyst Mike Mayo and his team.
"About one-fourth of bank portfolios have so far seen
significant problems (particularly residential mortgage and
construction) -- these problems are likely to continue, but the
other 75% is likely to see an acceleration in the pace of
problems."
As a result of these dire projections, Deutsche Bank has cut
2009 estimates on 16 large commercial banks. "These estimates are
now about one-third below consensus," said Mayo.
The banks that saw their estimates cut included Dow Jones
Industrial Average components J.P. Morgan Chase & Co. (JPM),
Citigroup Inc. (C), and Bank of America Corp. (BAC) as well as
Wells Fargo & Co. (WFC), all of which continue to carry hold
ratings.
The SPDR KBW Bank ETF (KBE), an exchange-traded fund that tracks
U.S. banking stocks, was down 2% at last check.
'Increased risk' in bank industry
The 2009 earnings estimate for J.P. Morgan Chase got cut by 65
cents, to $2.05 a share, but Mayo sees opportunistic landscape for
the company. "Despite these earnings challenges, we expect [the
company] to gain share in many areas (especially capital markets),"
he wrote.
The outlook for Citigroup isn't as rosy, and the bank rates as a
hold for more negative reasons. "We believe that the share price is
not currently trading on fundamentals given recent high
volatility," said Mayo.
Accordingly, Deutsche Bank's price target for Citigroup shares
is set at $9. In morning trading Monday, they changed hands at
$7.39, up 3.5%.
Mayo cut Citigroup's 2009 bottom-line estimate by 30 cents,
forecasting a loss of $1 a share.
As for Wells Fargo and Bank of America, both have share prices
that "reasonably reflect risks and rewards," said Mayo.
However, he updated his 2009 profit estimate for Wells Fargo to
reflect a cut of 30 cents to $1.70 a share, while Bank of America's
projection was lowered by $1.15 to $1.35 a share.
"The bank industry has taken on increased structural risk in
additional to mortgages that should become more apparent during the
cyclical slowdown," Mayo said in his sector note.
"The industry is likely to reduce risk-taking to achieve greater
long-term strength and stability even if it means lower returns and
less growth."
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