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A "Bloodbath" By Any Other Name: More Pain Ahead for Big Banks, Whalen Says

Posted Jan 19, 2010 02:44pm EST by Aaron Task in Investing, Banking
Related: MS, BAC, GS, JPM, USB, WFC, C
A big week of bank earnings accelerates midweek with results expected from Morgan Stanley, Bank of America, US Bancorp and Wells Fargo on Wednesday, followed by Goldman Sachs, American Express and Capital One Financial on Thursday.

So what should investors expect? More revenue disappointments, such as those already posted by JP Morgan and Citigroup, according to Chris Whalen of Institutional Risk Analytics.

"Right now the total egg - credit -- is shrinking," Whalen says. "The bank side is not a source of growth. Can you pull it out on the capital market side? Maybe, but I'm not sure where that comes from" given many of the big banks have loaded up on low-risk securities in the aftermath of 2008's bloodbath.

Speaking of "bloodbaths", I asked Whalen if he's sticking by the gruesome forecast he made here back in October. The answer is "yes", albeit with some caveats.

"Loss rates for the industry will be very high," Whalen says, forecasting record charge-off rates, higher loan loss reserves and a lot of "minus signs" for banks' bottom lines.

Still, the Fed's program of buying toxic securities means "everyone gets a pass on market-to-market," with the biggest banks getting a disproportionate benefit, he says.

Editor's note: Click here for Whalen's analysis of Citigroup's results and check the accompanying video to get Whalen's take on:

  • Why US Bancorp is his favorite big bank. (Whalen doesn't own or short individual bank stocks; IRA doesn't do investment banking.)
  • Whether Morgan is a better trade right now vs. Goldman Sachs, as many have proposed.
  • The outlook for new CEOs at Morgan Stanley (James Gorman) and Bank of America (Brian Moynihan).

 

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