The credit crunch is far from over, says Oppenheimer analyst Meredith Whitney.
Bank write-offs will continue, financial stocks will continue to slide, and home values will continue to fall, Whitney tells Fortune magazine.
In addition, banks have yet to come clean about their mortgage-backed securities losses.
"I do not think we are near the end of write-downs," she says, "so I continue to see capital levels going lower, capital raises diluting existing shares further, and stocks going lower."
According to Whitney, more than 25 institutions will seek extra capital in the next two months. That includes Citigroup, UBS and, to a lesser degree, Bank of America.
All the hundreds of billions of capital so far as just plugged holes, not fed growth, she says.
In addition, many, such as Citi, will have to cut their dividends. Giving sizable dividends while simultaneously seeking more capital makes no sense, she says.
An incestuous relationship between banks and credit rating agencies that helped cause the credit crunch will continue to plague banks, Whitney says.
Rating agencies, paid by the bond issuers to rate their bonds, gave the securities high marks. When loans backing the bonds went bad, the agencies came under fire.
Now Moody's and Standard & Poor's are downgrading ratings in a hurry. That creates a vicious cycle, since downgrades force banks to improve capital ratios by issuing new stock, which in turn dilutes stock values.
"You're going to have this stealth pressure on bank balance sheets until you start to see the ratio of downgrades to upgrades change," Whitney says.
Falling home values also will hurt financials, Whitney predicts. While banks typically expect home values to fall 20 percent to 25 percent from their peaks, the Case-Shiller housing futures index predicts a 33 percent decline.
Whitney goes even further, and predicting a drop approaching 40 percent.
The disappearance of the securitization market and loss of credit to consumers are to blame, she says. Unable to sell mortgage bonds, big banks cannot lend as much.
That, in turn, makes it difficult for consumers to buy homes, which pushes home prices even lower.
Banks must slash expenses to reflect the loss of securitization, Whitney says. In fact, banks have laid off about 7 percent of their employees so far this year, but some estimate they will have to shed up 25 percent.
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