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Business Title: Why Banks Can't Bounce Back One reason investors jumped into bank stocks last March, sending them soaring along with the rest of the market, was the prospect that financial insitutions that survived the mortgage crisis might make a lot of money afterwards. With the support of the U.S. Treasury and the Federal Reserve it certainly seemed a lock -- the government's strategy has been to make it easy for banks to earn their way back to stability and out of debt to the taxpayer. But so far, end-of-2009 numbers from the big banks have been negative and analyst Joe Morford of RBC Capital Markets says to expect the same from smaller lenders. With mortgage problems already three years old, this raises the possibility that the banking sector may not snap back the way investors believe or regulators hope. There’s precedent on which to build an optimsitic view that surviving banks could make a bundle. It happened after the savings-and-loan crisis of the late 80s and early 90s. Investors who purchased failing S&Ls or their assets often made a fortune while existing banks that had eschewed the excesses of their rivals went on to benefit mightily from the 1990s booming economy. Low interest rates, a rash of failed competitors and a huge expansion of debt in the U.S. fueled those profits and helped bring about the mega-banks of today. But there are some big differences between now and then. Overall credit in the economy is shrinking so, even though banks are benefiting from low interest rates by paying depositors virtually nothing, there aren’t many people to lend to. Consumer credit data shows that U.S. households are shedding their debts faster than at any time in decades. While low rates ordinarily encourage borrowers to go out and buy homes, the last ten years put so many Americans into homes that there just isn’t as large a pool of potential homebuyers anymore. Then there is the problem of bad loans. A quick recognition of bad debts and recapitalization by shareholders sets the stage for a return to fiscal health. That is not what the banking sector is practicing today, warns Morford in his bleak outlook for fourth quarter bank earnings. While some of the bigger banks have been encouraged to write down loans that will not be repaid, plenty of smaller lenders are waiting as long as they can to recognize their losses. That makes it harder for investors to commit to owning bank shares. Meanwhile, a problem that began in residential real estate has spread to commercial property, construction loans and, lately, plain old business loans. This time, there’s no Internet boom to rescue the stumbling economy. Though investment banking has picked up with JPMorgan Chase ( JPM - news - people ) and Bank of America ( BAC - news - people ) raking in boatloads of cash by underwriting bond offerings for the big companies that can still access the capital markets, it's not a sure thing. Morgan Stanley ( MS - news - people )'s investment banking results disapointed the Street (see "Morgan Stanley Disappoints"). Much of Citigroup ( C - news - people )’s $7.6 billion fourth-quarter loss and Bank of America ( BAC - news - people )’s $5.2 billion boo-boo can be attributed to paying back the government for bailing them out. Expect other banks reporting this season to take large, one-off charges for getting the govenrment off their backs. But that’s not the whole story. Morford thinks non-performing assets, a broad definition of loans gone bad, will rise 12% in the final quarter of 2009 to hit 5.9% of outstanding loans. While residential real estate appears to be stabilizing in western states, commercial property and business credits are getting worse, not better. The banking crisis isn’t over.
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#1. To: war (#0)
Some predict over 2000 banks are going to go under THIS YEAR. We'll see.
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