Mike Mayo, Meredith Whitney: Worse Yet to Come

from 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 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.”

Seven Deadly Sins

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. Home prices are not done falling and will ultimately drop 50 percent from their peak, Whitney said today in a CNBC interview.

The unemployment rate also has exceeded banks’ projections and could lead to further loan losses, Whitney told Forbes. Banks “by and large” will show profits in the first quarter before provisions for loan losses, Whitney said on CNBC.