Banking Analyst Mayo Says Worst Yet To Come For Banks

Well known banking analyst Mike Mayo is out with a new analysis of the banks that has a lot to do with the market’s slide this morning. Mayo has a reputation for being independent. He also happens to be pretty negative on the banks’ prospects at this point in time.

From Bloomberg:

While certain mortgage problems are farther along, other areas are likely to accelerate, reflecting a rolling recession by asset class,” Mayo wrote. “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.”

Mayo said he expects loan losses to increase to 3.5 percent, and even as high as 5.5 percent in a stress scenario, by the end of 2010. 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.

The nation’s largest banks may be transitioning from a financial crisis marked by writedowns of capital to an economic crisis featuring large loan losses, Mayo wrote. The U.S. government cannot provide much relief because its actions will lead to either banks having to raise new capital or toxic assets remaining on banks’ balance sheets, Mayo wrote.

Mayo said solutions to the banking crisis will take time, as the increase in risk happened over a decade or more.

I suspect that Mr. Mayo is more on target than most of would like to think. All of the focus has been on residential mortgages but as you know, commercial real estate, other consumer loans, loans used to finance leveraged buyouts and on and on still have to be addressed.

What isn’t covered in the report is the likely impact on the smaller banks. Most of them avoided the worst of the residential mortgage mess as they were luckily squeezed out of that market by the bigger players. They tended to balloon their balance sheets with commercial real estate loans the bill for which is just coming due. Absent a miraculous economic rebound we will probably lose an awful lot of community banks.

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