It's been a rough year for the financial sector and the outlook for a 2011 comeback is grim, according to Chris Whalen, co-founder of Institutional Risk Analytics.
"It's a good time to be cautious," he says. "Look at the end of QE2 [and] tightening in Europe...this is very bearish for financials."
A number of issues explain why Whalen is still skeptical on the big banks -- even as that view is starting to become consensus among sell-side analysts, who are typically the last to see a turn -- including:
Limited revenue opportunities: "The negative outlook for housing implies that bank revenue and earnings will remain under pressure for most if not all of 2011 and 2012," he writes in a recent report, noting "many banks are explicitly tying forward guidance for revenue, earnings and credit expenses to a rebound in the [Case-Shiller Housing Price Index]."
Deteriorating net interest margin: "The benefit to banks of low interest rates is well-past the tipping point," he writes. "The runoff of higher yielding assets on bank portfolios is accelerating and the reinvestment rate for cash is roughly half the yield of existing assets."
In the above video, Whalen discusses these and other issues, including what he calls "regulatory friction" -- which isn't just a problem for Goldman Sachs. The oft-bearish bank analyst also reveals his favorite names among the "second-tier" banks and why Goldman might ultimately have to seek a buyer.