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Mayo Warns on Bank Losses

Written By Brian Hicks

Posted April 7, 2009







So much for the “green shoots” everybody has been touting these days in regards to the health of the financials—myself included.

They were summarily squashed this morning by a respected bank analyst named Mike Mayo.   Before the bell, Mayo warned on the banks as they head into earnings next week.

Here’s the skinny on what was essentially a sector-wide downgrade.  

From Bloomberg by Michael J. Moore entitled: Mayo Gives ‘Underweight’ Rating to Banks, Citing Loan Losses    

“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.”  

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.”  


Related Articles:  

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Rasmussen: 53% say 30’s style depression is “somewhat likely”  

Nancy Pelosi: “500 Million American Jobs a Month” at Risk  

Jim Rogers: “This is not going to solve the problem”  

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