Growing signs of economic weakness, slower job growth and a debt crisis in Europe and possibly the U.S. have battered bank stocks this year.
One of the biggest laggards is the largest one (by assets) of them all - Bank of America. The stock is down about 30% from its high this year on fears the mortgage mess still isn't over and there are more losses and lawsuits to come.
Sanford Bernstein's banking analyst John McDonald says BofA could face $27 billion in further mortgage losses by 2013. "The process of addressing legacy mortgage issues will be long and arduous," according to McDonald's note cited in a Bloomberg news report. "Recent declines in home prices and an uptick in employment trends create an upward bias to our loss estimates" for the lender. The Bernstein analysts do note that unless the losses surpass $55 billion, the bank won't need to raise more capital.
Dan Alpert managing principal with Westwood Capital is very concerned about Bank of America and the entire banking industry. As he explains to the Daily Ticker's Aaron Task in the accompanying interview, Alpert's expecting more pain for the "too big to fail" bunch stemming from the still weak housing market. The big worry in his view is the performance of the $1.1 trillion mortgage portfolio the big four banks hold. "The banks are required to tell us very, very little about their performance," he says.
Meanwhile, while the loans may be losing value. Banks have been allowed to 1) lower their provisions and 2) declare dividends. (Bank Of America was prevented by regulators from raising its dividend.)
On the provisions, Alpert's main concern is that they're lowering provisions which is raising net income at the same time macro conditions are deteriorating. They are not "sufficiently provisioned against losses that are likely to come down the pike," he quips. Potentially just as bad are the dividends. "In an environment where collateral for one of the largest asset classes is shrinking," he asks "does that make a whole lot of sense?"
Is he right?