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Meredith Whitney Says Banks are Still Expensive

Written By Brian Hicks

Posted November 6, 2008

It was Halloween 2007 when Meredith Whitney suggested that Citigroup was a growing train wreck since the ratio of tangible assets fell to 2.8%, the lowest in decades.  She even said Citigroup may have to cut its dividend, raise cash, or sell assets to raise more than $30 billion to raise capital.

And she was right.  The stock, still a train wreck, has lost about 50% since she spoke.

But Citigroup wasn’t the only bank to feel her wrath.  No bank was safe from it.  The only benefit was that she was right, warnings investors to stay away from banks like Citigroup.

Even these days, thanks in part to a weakening economy and increasing regulation, Meredith Whitney believes financial stocks are going to get hit again… sentiment we’ve shared in Options Trading Pit, as well.

Here’s more of what she shared with

“Banks simply won’t be able to provide the kind of easy credit that consumers had gotten used to over the past five years. That means income will have to go down, even though Wall Street expects banks to grow income from here.

“The market has accepted the fact that the securitization market is not coming back. That’s a huge portion of lending for consumers,” Whitney told CNBC.

“Eighty-five percent of the lending is for mortgages, about 50 percent of the lending is for credit card loans.”

As a result, the consumer credit market as most people understand it shrinks dramatically, Whitney warned.

“What we’re actually going to see going forward is contraction in the overall mortgage market. That’s never happened,” she said. “In the credit card industry, you’re going to see $2 trillion in credit lines pulled out of the system.”

“For a person who had credit for the first time in the last 15 years, you’re going to see credit taken away from them by a large degree. We’ve never seen that before in this country.”

Add in coming job losses and a looming and painful recession, and banks simply have to make less money. As the asset bases of banks shrink, cost-cutting won’t be able to keep up.

The problem for investors, Whitney says, is that Wall Street now expects the banks to do the opposite – make a lot more money, just like before the crunch.

“My estimates are anywhere from 30 percent to 70 percent below the Street,” Whitney says. “We’re in for a rude awakening that may result in a slow grind down for these stocks.”

The banks, which have already tapped tens of billions from the government to shore up balance sheets, will come back for capital again within nine months, Whitney predicts.

“So, effectively, you have a highly regulated utility that pays no dividends,” she says.