Banks Are Not Reaching Bottom - Meredith Whitney

Banks are reaching a bottoming phase according to BCA research and neutral positions are warranted. Not so fast says top bank analyst Meredith Whitney. Banks are about to have an asset fire sale after their last source of capital, the U.S. government, runs out.

Loan loss reserves as a percentage of non performing assets have reached cyclical lows of the early 90s, says BCA Research. This analysis, based on FDIC data, looks thin. For one thing, it is based on bank data for the fourth quarter of 2008, which is dated. For another it only looks back to the late 80s and early 90s, which featured a banking crisis in a shallow recession unlike today.

The first round of losses at U.S. banks were in real estate lending-- in subprime lending and most prominently in construction and land development (AD&C) lending according to Zelman & Associates. AD&C loans accounted for only 4% of bank assets in the fourth quarter of 2008 but a disproportionate share of non-performing loans (22%).

The second round of losses is in consumer credit. It is being "ripped out of the wallets" of American consumers says Whitney. Credit lines worth more than $4-trillion are being cut in half as banks retrench from lending. That has repercussions for the top five banks where most of the credit card lending is centered.

Bank charge-offs could reach over 3.5% by the end of 2010 and go as high as 5.5% exceeding rates reached in the Great Depression says another top-rated bank analyst Mike Mayo of brokerage CLSA. Mayo recently assigned an "underweight" rating to U.S. banks.

Banks will be forced to sell their prized assets after the government turns off the funding taps, says Whitney. The Treasury has little to nothing to show for the $350-billion in TARP money used to inject capital into the banks, and equity investors should avoid the banks at all cost.

Comments

[Mad Hedge F...:]

I was thinking the same thing. Will someone please help me out here? Q1 is widely expected to be the quarter from hell, with earnings expected to plummet by 38%, and the market rockets 26%, the biggest hyperbolic move since 1930. Is there a disconnect here? I know I only got a magna cum laude in math in college, not the summa cum laude I deserved (my professor didn’t understand his subject and hated me for it). But is it possible that the market has gotten ahead of itself? Just a tad? Is the economy really going to have the massive bungee cord type recovery that the market is discounting here? Could we be setting up for the perfect sell in May and go away scenario, like we saw last year? I don’t get this. I await your comments in earnest.

Apr 12 11:26 AM

[Wallstreeto...:]

We should be careful not to equate a little optimism in the charts with economic vitality. The recent infusion of cash by the government is going to distort perceptions. If it is followed by private sector cash and economic activity we may have seen the bottom, if not, we're heading back down.

Apr 12 11:58 AM

[Gtarras:]

Roubini uses IMF models, no wonder they have same results.. Let me ask you this question, when was last time IMF correct about anything? Simply go outside of the US (Russia, Indonesia, Korea etc etc etc), they can tell you lots of stories about IMF. NONE will be positive..

Just like Whitney (LOL, he/she), these academicians have never stepped outside of their ivory towers (Well, Whitney never worked at the bank, she is clueless what they do. I've been there for 15 years, takes a lot of time on the inside to figure it all out. and I mean the capital markets side of things, not M&A etc). Just like Cramer says: They have no clue!! This week will be hugely positive when C, BCA etc report. Well, FAS 157 cancellation is a big part of it. But listen, Whitney et al, are part of (or were duped by) the sharks of Wall Street, who dont give a damn about you or me, or the economy... They have shorted the banks (and financials), and are now destroying them.. Wont last.. Its almost over.. Expect a huge swing in the opposite direction.


On Apr 12 10:20 AM CautiousInvestor wrote:

> It's a horribly complex landscape.
>
> Both the IMF and Roubini believe global losses on loans and securitized
> loans will exceed $ 3.0 trillion. Of this total $ 1.3 trillion has
> been written-down. Credit and auto loan losses could add to these
> amounts.
>
> Treasury has told us that none of the 19 banks undergoing stress
> tests will fail. Some, though, will need to discard troiubled assets
> and raise capital within the allowed period of six months. If they
> are unable to raise the required capital from private sources, the
> government will buy convertible preferred shares with strings attached.
>
>
> To avoid the strings, which impinge upon such delicate issues as
> executive compensation, Goldman Sachs and others are negotiating
> arrangements to raise capital and repay TARP monies. A return of
> taxpayer funds would manifest the bank’s restored strength and set
> it apart from the pack. I think Treasury would like to keep the banks
> beneath their thumbs to enjoy greater control and perhaps steer lending.
>
>
> Sooooo, we have looming losses, the likely prospect that some of
> the 19 will need new capital and be forced to sell distressed assets
> and a a couple of banks that will be able to crawl out from beneath
> the TARP. The industry still has plenty of problems but it looks
> likes those who can escape TARP will be the safest plays as they
> have capital and operating independence.
>
>
>
>

Apr 12 12:04 PM

[sabre_jenn:]

Any honest assessment of banks needs to look at EBTSAT (earnings before Treasury Subsidies and TARP).

Even a monkey -- no, even a bank CEO sitting on his $35,000 toilet -- can make money if the Treasury is subsidizing the bank with a steep yield curve and essentially zero borrowing cost on garbage collateral.

Throw in a one time "gain" for closing out CDS trades with AIG at a massive profit (the bid/ask spread for closing a CDS has always been huge, plus every bank knew that AIG had no choice but to close the trade) -- and even the most talentless bank CEO can show a good January / February.

Wells Fargo, just to take one example, is heavily concentrated in California. The state's budget is out of control (which hits property taxes), while state unemployment continues to grow. One of the biggest lenders in California cannot be immune to this mess, and that is before one considers the addition of Great Western Financial (subprimes) which Wells Fargo got as part of Wachovia.

WFC's earnings doesn't pass the low tide sniff test. Either everybody in California are lying and IndyMac's collapse was a mass halucination -- or else WFC has exposure they aren't admitting to

On the other side of the world, Citi and JPM have massive derivative books that have barely been reduced. BankAmerica has the mess that was Countrywide (the other half of the IndyMac "empire") to deal with.

The news is filled with homeowners (aka mortgagees) having trouble making ends meet while watching their neighbors lose jobs -- and somehow we are supposed to believe the banks will not have further write downs?

Apr 12 12:06 PM

[sabre_jenn:]

Oh, and I almost forgot to mention that bank accounting numbers are now officially fabricated, as FASB has endorsed mark-to-CEO-imagination accounting figures

You have to be a serious chump to believe a bank's balance sheet anymore

Apr 12 12:11 PM

[hmmm.really:]

'WFC's earnings doesn't pass the low tide sniff test. Either everybody in California are lying and IndyMac's collapse was a mass halucination -- or else WFC has exposure they aren't admitting to'

This is the kind of comment that doesn't pass the 'fact' test. WFC didn't participate in the kinds of mortgages that killed IndyMac. In fact it gave up significant market share during the last several years will Indy, Countrywide, and others helped to create this mess. Perhaps rather than 'sniffing' a little fact-checking might be in order.


On Apr 12 12:06 PM sabre_jenn wrote:

> Any honest assessment of banks needs to look at EBTSAT (earnings
> before Treasury Subsidies and TARP).
>
> Even a monkey -- no, even a bank CEO sitting on his $35,000 toilet
> -- can make money if the Treasury is subsidizing the bank with a
> steep yield curve and essentially zero borrowing cost on garbage
> collateral.
>
> Throw in a one time "gain" for closing out CDS trades with AIG at
> a massive profit (the bid/ask spread for closing a CDS has always
> been huge, plus every bank knew that AIG had no choice but to close
> the trade) -- and even the most talentless bank CEO can show a good
> January / February.
>
> Wells Fargo, just to take one example, is heavily concentrated in
> California. The state's budget is out of control (which hits property
> taxes), while state unemployment continues to grow. One of the biggest
> lenders in California cannot be immune to this mess, and that is
> before one considers the addition of Great Western Financial (subprimes)
> which Wells Fargo got as part of Wachovia.
>
> WFC's earnings doesn't pass the low tide sniff test. Either everybody
> in California are lying and IndyMac's collapse was a mass halucination
> -- or else WFC has exposure they aren't admitting to
>
> On the other side of the world, Citi and JPM have massive derivative
> books that have barely been reduced. BankAmerica has the mess that
> was Countrywide (the other half of the IndyMac "empire") to deal
> with.
>
> The news is filled with homeowners (aka mortgagees) having trouble
> making ends meet while watching their neighbors lose jobs -- and
> somehow we are supposed to believe the banks will not have further
> write downs?

Apr 12 12:19 PM

[dcb:]

I was thinking this will be a sell in may year too. perhaps a rally into next quarter and then people will see things have gotten worse not better.

On Apr 12 11:26 AM Mad Hedge Fund Trader wrote:

> I was thinking the same thing. Will someone please help me out here?
> Q1 is widely expected to be the quarter from hell, with earnings
> expected to plummet by 38%, and the market rockets 26%, the biggest
> hyperbolic move since 1930. Is there a disconnect here? I know I
> only got a magna cum laude in math in college, not the summa cum
> laude I deserved (my professor didn’t understand his subject and
> hated me for it). But is it possible that the market has gotten ahead
> of itself? Just a tad? Is the economy really going to have the massive
> bungee cord type recovery that the market is discounting here? Could
> we be setting up for the perfect sell in May and go away scenario,
> like we saw last year? I don’t get this. I await your comments in
> earnest.

Apr 12 01:11 PM

[Allan Frain:]

Investors do not know what remaining Bank balance sheets look like. Their value lies in their ability to receive bailouts, and negative-real interest loans from the Fed.

The bailout scenario may have been played out. The element of surprize is gone. The next downturn is not likely to see a Congress willing to create another few trillion as US citizens relize it is nothing more than an indescriminate form of taxation.

Negative real interest rates cannot persist forever, either. Failed auctions are telling in this regard.

How long can these two crutches hold Banks up ? Either one believes that the bottom is in or serious concern is warranted.

Apr 12 01:19 PM

[Ishortyou:]

well I think only when the oversupply in housing is corrected, the new housing starts stops and the wave after wave of foreclosures stop glutting the supply in housing then I would probably think that we are in a good footing but unless this happens uncertainties will kill the market.

Apr 12 02:13 PM

[pitchingpen...:]

hmmmmmmreally........

"WFC didn't participate in the kinds of mortgages that killed IndyMac."

Patently false statement. B.ravo S.ierra.

Apr 12 03:52 PM

[jdl51:]

"Banks will be forced to sell their prized assets after the government turns off the funding taps, says Whitney. The Treasury has little to nothing to show for the $350-billion in TARP money used to inject capital into the banks, and equity investors should avoid the banks at all cost."

The TARP fund was around $700 billion of which around $350 billion has been handed out to financial institutions. Some of them, GS, BAC, MS, WFC are talking about paying off their TARP money early, maybe even this year. This would still give the government more money to prop up other institutions if the need arises, not less. So I don't know how she can make a comment like that considering the present circumstances unless the bank CEOs are talking through their a$$es. Oh.........

Apr 12 04:27 PM

[InvestBaboo:]

Looking purely at charts (which have never been wrong) the buy signals on banks strengthened even more considerably now to 3rd level a feat unseen since the downturn began. BAC and C results will help nail the direction of the bull.

Apr 12 05:28 PM

[William Cowie:]

Meredith Whitney surfaces this notion of taxpayer subsidies for banks drying up. What will the banks do when it does?

But will it? Nothing I've seen to date assures me that is going to happen. Mr. Geithner just got himself a new toy, a printing press, and he and the Fed said they're going to have themselves a party with this new toy. Only Wall Street execs seem to be invited to this party (as the Detoit execs found out), and they said it's going to get wild.

I've seen nobody call the police to end it yet. Because the neighbors haven't found the number to call yet.

Apr 12 06:15 PM

[KIT:]

So goes January so goes the year ..... short memories abound

Apr 13 12:15 AM

[Fred Voetsch:]

On Apr 12 09:50 AM whisperonthewind wrote:

> He/she is not always right. (YAY, finally a valid chance to use he/she!)
> He/she is always vocal, but I stopped listening a long time ago.


The fact that you don't know suggests to me you should be ignored. Meredith Whitney is perhaps the best Wall Street/banking analyst out there today.

Apr 13 02:31 AM

[normthefedup:]

Listen all...Meredith (she) recently left Morgan Stanley and started her own consulting "thing." The more noise she makes, the more money she makes. Ms. (that's female) Whitney, my humble opinion? You got lucky on the predictions and you're just riding the wave. Put it to bed because too many people take what you say as gospel. And too many doom and gloom specialists have a habit of shoving their opinions down to many ignornant people's throats to the extent that their "predicitons" become self-fulfilling prophesies. You and your ilk need to give it a rest and, as you all recommend, "let the market take care of itself." Translation: shut the hell up.

Apr 13 08:57 AM

[Slim Shady:]

Actually, she left Oppenheimer, not Morgan Stanley


On Apr 13 08:57 AM normthefedup wrote:

> Listen all...Meredith (she) recently left Morgan Stanley and started
> her own consulting "thing." The more noise she makes, the more money

Apr 13 04:38 PM

[ed233:]

Meredith Whitney has in the past made some pretty damn good calls. You have to give her, her due. I can see why she is now working for herself because it demonstrates to me her commitment to act as a voice for truth without having an employer stand over her shoulder dictating the degree to which she should be making negative comments. And especially so if it is against an industry that was providing indirectly her pay check. There is a warning sign posted by her and it might be prudent to act cautiously in light of it. Only looking out for your money. LOL

Apr 13 08:57 PM

[phubaiguy:]

It's not the perfect bank I'm after, it's the ones whose stocks go up. She surely would have advised against C at .97 and BAC at 2.62 but if I'd put $50k in each of them then I would have $331,000 profit by after hours tonight. In OZRK, a perfect bank, I would have $50,000 profit from a $100k..which includes wow a $2.06 gain in after hours today..record profits this quarter! This looks like a week for banking both good and not perfect or listen to Meredith and forego the profits this week. In the long term she's probably right but in the long term problems are fixed also and C will no longer be a $4.00 bank stock.

Apr 13 11:13 PM

[mr clark:]

so insolvant companies are buys according to bank bulls? then why not buy Lehman on the pinks?

why do research and look at balance sheets if the rules of accounting no longer apply?

Apr 14 12:05 AM