Tags: meredith | whitney | banks

Whitney: Banks Still Way Too Expensive

By    |   Wednesday, 05 Nov 2008 04:16 PM

Already in a pit, financial stocks are about to get clobbered again, warns Oppenheimer banking analyst Meredith Whitney.

A number of factors will converge on large-cap bank stocks shortly, including a weakening economy and increasing regulation.

Most importantly, 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.

Are banks a trap? Not if you take the right time horizon, notes Barclays Capital banking analyst Jason Goldberg.

"During the past two credit cycles, bank stocks bottomed a full year before credit losses peaked," Goldberg told Barron’s.

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Already in a pit, financial stocks are about to get clobbered again, warns Oppenheimer banking analyst Meredith Whitney.A number of factors will converge on large-cap bank stocks shortly, including a weakening economy and increasing regulation.Most importantly, banks simply...
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2008-16-05
Wednesday, 05 Nov 2008 04:16 PM
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