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Mayo Gives ‘Underweight’ Rating to Banks, Citing Loan Losses

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  • Mayo Gives ‘Underweight’ Rating to Banks, Citing Loan Losses

    By Michael J. Moore

    April 6 (Bloomberg) -- CLSA analyst Mike Mayo assigned an “underweight” rating to U.S. banks, saying loan losses may exceed Great Depression levels and the government may be forced to take over large lenders.

    Financial shares and major U.S. stock indexes dropped after Mayo advised clients to sell shares of banks including Winston- Salem, North Carolina-based BB&T Corp. and Cincinnati’s Fifth Third Bancorp. Mayo said in a report today that he assigned “underperform” ratings to Bank of America Corp. and JPMorgan Chase & Co., the two biggest U.S. banks by assets.

    “While certain mortgage problems are farther along, other areas are likely to accelerate, reflecting a rolling recession by asset class,” said Mayo, who joined CLSA from Deutsche Bank AG last month. “New government actions might not help as much as expected, especially given that loans have been marked down to only 98 cents on the dollar, on average.”

    The 46-year-old Mayo gained recognition in 1999 at Credit Suisse AG for correctly taking a bearish stance on bank stocks when other analysts remained bullish. After being fired from Credit Suisse, he joined Prudential Equity Group in 2001, where he earned a reputation for criticizing investors and companies who tried to curb objective analysis. At Deutsche, Mayo had “sell” or “hold” ratings on all 18 companies he covered, according to data compiled by Bloomberg.

    Bank of America, based in Charlotte, North Carolina, fell 21 cents, or 2.8 percent, to $7.39 at 12:52 p.m. in New York Stock Exchange composite trading. New York-based JPMorgan dropped $1.48, or 5.1 percent, to $27.82. The KBW Bank Index lost 5.2 percent, the first decline in five days.

    Government Takeovers

    Nationalization of banks remains a possibility because government policy remains unclear, Mayo said on a conference call after releasing his report.

    Existing government efforts aimed at boosting bank capital don’t “preclude regulators from taking harsher action,” Mayo said. “I don’t want to be a partner with the government in investing in bank stocks.”

    Mayo said he expects loan losses to increase to 3.5 percent, and as high as 5.5 percent in a stress scenario, by the end of 2010. The highest level of loan losses in the Great Depression was 3.4 percent in 1934, according to the report. Mayo’s estimate matches the prediction he made on March 10 for Frankfurt-based Deutsche Bank.

    Mortgage-related losses are about halfway to their peak, while credit-card and consumer losses are only a third of the way to their expected highest levels, according to Mayo, who declined to comment beyond the report. CLSA is an affiliate of New York-based Calyon Securities.

    Economic Crisis

    The nation’s largest banks may be transitioning from a financial crisis marked by writedowns of capital to an economic crisis featuring large loan losses, Mayo wrote. The U.S. government cannot provide much relief because its actions will lead to either banks having to raise new capital or toxic assets remaining on banks’ balance sheets, Mayo wrote.

    Mayo said solutions to the banking crisis will take time, as the increase in risk happened over a decade or more.

    CLSA’s underperform rating reflects the expectation that the stock will underperform the local market by 0 to 10 percent, while a sell rating expects it to fare worse by more than 10 percent, according to the report.

    Mayo said banks engaged in “seven deadly sins”: greedy loan growth, gluttony of real estate, lust for high yields, sloth- like risk management, pride of low capital, envy of exotic fees, and anger of regulators. Mayo’s “underweight” rating applies to the entire sector.

    Meredith Whitney, who left Oppenheimer & Co. in February to found Meredith Whitney Advisory Group LLC, said in a Forbes interview that banks will continue to write down their mortgage assets as home prices decline further than lenders expected. The unemployment rate also has exceeded banks’ projections and could lead to further loan losses, Whitney said.

    Source: http://www.bloomberg.com/apps/news?p...n5c&refer=home

    Cheers

    Marc
    Free business resources - www.BusinessBlogsHub.com

  • #2
    I can see a critical point when the "bailout" efforts will have to stop and natural forces take over. These natural forces may be generated by the general public forcing them to. Then it will be a snowball effect and only true Capital and real production will remain. I think (if that happens) thats a good thing, all the excess and malinvestment is wiped out along with the Companies that support it and a more sustainable approach is quickly implemented. Instead of prolonging the pain.

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