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RBC: 150 U.S. Banks Face Failure



April 08, 2008 – Comments (1)

Some US banks face failure as credit problems mount-RBC Mon Apr 7, 2008 2:22pm EDT(Recasts; adds analyst's comments, background, share movement)

April 7 (Reuters) - During the next two to three years, U.S. bank failures will likely increase dramatically from the low levels recorded from 2004 to 2007, as credit problems mount for the industry, a RBC Capital Markets analyst said.

"We anticipate upwards to 150 banks will fail over the next two years. Banks that deplete their capital through rising credit losses are most vulnerable to failure," Gerard Cassidy said.

He said credit problems at U.S. banks are expected to worsen throughout the year from existing levels and are unlikely to peak until sometime next year, also noting that widespread housing deflation will put further pressure on the economy.

"As we move deeper into 2008, we expect to see economic growth grind to a halt with recessionary pressures mounting as the year progresses," Cassidy said, recommending investors "underweight" the bank sector.

Recent aggressive actions taken by the Federal Reserve provide some relief to illiquid credit markets, but do not directly address deteriorating commercial real estate and construction and development credit quality trends, Cassidy said.

He expects an uncertain political environment in a presidential election year, continued deteriorating market fundamentals in the residential market and higher unemployment to force credit costs higher for the U.S. banking industry.

He said any potential recessionary period will only weaken credit quality at commercial banks from current levels, likening current trends to the 1990-91 recession.

In the 1990 downturn for banks, delinquent loans were rampant and reached levels that led to massive bank failures all over the country, he noted.

"In the current downturn we have not even scratched the surface of losses and in many loan categories, we anticipate that additional losses are forthcoming," he said.

"We strongly believe that credit will worsen from present levels spreading from home mortgages into home equity, credit cards, auto, commercial real estate, construction and leveraged loans this year," he wrote in a note to clients.


The analyst also said banks' stock valuations were still expensive, saying that the forward 12-month price-to-earnings ratio for the top 50 banks stand at 13.2 times versus a 25-year average of 10.9 times.

"We believe it remains too early for long-term investors to step in and buy given that bank valuations are still too high relative to our expectations for significant credit deterioration that we foresee extending throughout 2008," Cassidy said.

The Standard & Poor's Financial Sector Index has lost about 30 percent of its value since it hit an all-time high in May last year. The index was up 6.05 points to 359.66 on Monday in afternoon trade. (Reporting by Tenzin Pema in Bangalore; Editing by Bernard Orr)

1 Comments – Post Your Own

#1) On April 09, 2008 at 1:35 PM, XMFSinchiruna (26.55) wrote:

Washington Mutual to close home-loan offices

Consolidation effort to eliminate 3,000 jobs
By Emmet Pierce
April 9, 2008

Washington Mutual yesterday announced it will close all 186 of its stand-alone home-loan offices nationwide, including four in San Diego County and 82 throughout California.The country's largest savings and loan said it is eliminating about 3,000 jobs, with the home-loan centers closing by the end of the month.
Lending will continue at regular branches, spokesman Gary Kishner said. Kishner attributed the layoffs to the declining market and a corporate decision to consolidate operations. He didn't rule out more staff reductions in the months ahead.
With the 3,000 layoffs, the institution known as WaMu is decreasing its home-loan group from 13,340 employees in January 2007 to about 6,200, Kishner said.
Economist Chris Thornberg of Beacon Economics said staff cuts at Washington Mutual were anticipated.

“WaMu is in big trouble,” Thornberg said. “They definitely have been making a lot of shaky loans, and they are paying the piper.”Hit hard by the recent surge in home foreclosures, the Seattle-based company also said yesterday that it would receive $7 billion in new capital from an investment group led by TPG, a private equity firm. The thrift also said it will get out of the wholesale lending business. That means WaMu won't be using mortgage brokers to market its loans, Kishner said.
“This substantial new capital – along with the other steps we are announcing today – will position us for a return to profitability as these elevated credit costs subside,” Chief Executive Kerry Killinger said in a statement.
Washington Mutual is one of many lenders that have been forced to raise capital from outside investors in response to the mortgage market meltdown. The depth of the lending crisis became clear over the summer, when mortgage default rates surged on risky subprime, adjustable-rate loans.
Such loans were used widely during the housing boom to keep monthly mortgage payments low as housing prices soared. Many people were allowed to qualify for such loans based on introductory “teaser” rates without documenting their income.
University of San Diego economist Alan Gin said lenders have been trimming staff locally for months. In February there were 23,000 people working in the lending industry within the county, Gin said. That's down from a high of 27,600 in November 2005, the peak of the housing boom.
The layoffs at WaMu are “just more fallout from the housing situation,” Gin said. “Homes aren't selling, so you don't need as many people giving out loans.”
The Associated Press contributed to this report.

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