The seven deadly sins of banking

April 7th, 2009

A US bank analyst is using biblical imagery to put the banking crisis into perspective.

Mike Mayo, an analyst at CLSA’s US broker-dealer affiliate Calyon Securities, believes that seven deadly sins of banking precipitated the crisis that got us into the current mess.

“We are initiating on US banks with an ‘underweight’ sector rating given the ongoing consequences of increased risk-taking by banks in seven different areas.

“The seven deadly sins of banking include 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.”

Initiating his coverage of the US banking sector at CLSA, Mayo kicked off with an “underperform” rating. He believes that the sector’s problems have further to run and predicted that the US government’s intervention is unlikely to help as much as some are expecting.

In the report Mayo, who recently transferred to Calyon from Deutsche Bank, added:

“A key implication is that loan losses (to total loans) should increase to levels that exceed the Great Depression. While certain mortgage problems are farther along, other areas are likely to accelerate, reflecting a rolling recession by asset class.”

He predicts that bad debts as a proportion of loans is set to rise from 2% to 3.5% by the end of 2010 given the ongoing problems in the US mortgage market and an acceleration of delinquencies and defaults in credit cards, consumer credit, construction, commercial real estate and industrial.

This would be a higher ratio than at the lowest point of the Great Depression in 1934, when loan losses reached 3.4% of total bank loans. Government intervention might not help as much as expected, especially given that loans have been marked down to only 98 cents on the dollar, on average, according to Mayo.

It seems that Mayo is not without influence. Following his note, and despite the FASB’s recent decision to cave in to industry and political pressure on ‘fair value’ or mark-to-market accounting, US bank stocks fell in unison. JP Morgan lost 3.7% to close at $28.20 on Monday, Bank of America was down 1.6% at $7.48, Citigroup slid by 4.6% at $2.72 and Wells Fargo slumped by 6.7% to close at $15.25. Shares of other large banks such as PNC and KeyCorp also fell.

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Posted by Ian Fraser on Apr 7 2009. Filed under Blog. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry