With commercial real estate showing better-than-expected numbers — although still citing major losses — analyst are asking themselves whether the second shoe left to drop in the financial crisis will be more of a ballerina slipper or a workboot? “Even though commercial real estate is very bad in this cycle versus prior cycles, it’s tracking much better than most of us thought in terms of loan losses. And one reason is restructuring those loans has helped to avoid some of the loss, and it’s postponed,” said Craig Siegenthaler, a senior equity research analyst who covers the financial sector at Credit Suisse. “So CRE, in our view, the hump in terms of the peak is much lower than we thought it was going to be. But it’s still likely going to have a high stream of losses that travel out into 2011 and 2012.”
Although commercial real estate losses are inevitable, Siegenthaler emphasizes that the inevitable might not be as bad as analysts originally predicted, leading to above-average quantity of losses.
“In our view, the inevitable keeps getting better,” said the analyst, pointing out that today’s financial issues have shifted from credit quality to earnings quality.
“All the big issues on credit have now turned into kind of earnings growth. So which loan portfolio is going to do best? What’s going to happen with deposits when the Fed rate is raised?” he said. “It’s clearly kind of an earnings story debate now that shifted from more of a credit quality debate in the last part of last year.”
Siegenthaler’s favorite Midwestern regional bank is Fifth Third Bancorp (FITB), which is currently trading at six times its normalized earnings estimate and has the potential to double that in two years.
