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Credit is Going to Get Worse

Written By Brian Hicks

Posted April 20, 2009

This is the last thing you want to hear from a banking CEO after the financial community has been giving tens of billions of dollars.

He’s warning that losses from bad loans will get worse “rather than better” and that his bank continues to put more money away to cover loan losses.

Here’s Bank of America’s Ken Lewis on our current situation:

Let me make a couple comments about our given environment. Credit is bad and we believe credit is going to get worse before it will eventually stabilize and improve. Whether that turn is later this year or in the first half of 2010, I’m not going to hazard a guess … For the rest of the year we look for charge-offs to continue to trend upward. I think it will be at a slower pace than we’ve experienced. Reserve build will also continue for the next couple quarters though not at the level we experienced this quarter. From an economic standpoint we believe we can see weak but positive GDP growth by the fourth quarter this year. I have to say that even our internal economists are a little at odds as to the timing, with some seeing recovery earlier. However, we think it prudent to run the company under an expectation it will be later in the year or early next year. We believe unemployment levels won’t peak until next year at somewhere in the high single digits. At this point we don’t see unemployment meeting or exceeding 10% but that will of course be impact by how long the economy stays in recession.”

Worse, we still have to deal with the stress tests, which are forcing more stress on Wall Street and Washington today, where people fear that the release of the stress test news could do more harm than good… and increase investor angst toward banks.

This Friday, the Obama Administration will release data on how it did the tests. On May 4, we’ll hear partial results of the tests, which will determine if banks need more bailout dollars and whether the $700 billion rescue fund needs to be refilled.

But it’s great news if you know how to trade it, as we do in Options Trading Pit.