Analyst Speaks of Seven Deadly Banking Sins, Bank Shares Dive

Shares of major U.S. banks were sent diving Monday morning after an obviously influential bank analyst predicted loan losses this sector will likely exceed Great Depression-era levels, as he believes the industry has fallen to “seven deadly sins.” “The seven deadly sins of banking include greedy loan growth, gluttony of real estate, lust for high yields, sloth-like risk management, pride of low capital, envy of exotic fees and anger of regulators,” said Mike Mayo, a former Deutsche Bank analyst now with Calyon Securities. “We are initiating on U.S. banks with an underweight sector rating given the ongoing consequences of increased risk-taking by banks,” in accordance to seven key areas, Mayo wrote in a note to investors, according to a Market Watch report. Mayo said loan losses to total loans should jump to levels that top the 1930s. And while certain mortgage problems are farther along, other areas are likely to accelerate, reflecting a rolling recession by asset class. The analyst predicted shares of Bank of America (BAC), J.P. Morgan Chase (JPM), Citigroup (C), PNC Financial Services (PNC), Wells Fargo (WFC) and Comerica (CMA) will underperform. He suggested investors sell shares of BB&T (BBT), US Bancorp (USB), SunTrust (STI), Fifth Third (FITB) and KeyCorp (KEY). Mayo also estimated loan losses to loans will likely increase from two percent to 3.5 percent by the end of 2010, and he warned government intervention might not provide the boost the market needs — considering loans have been marked down to just 98 cents on the dollar, he said. Write to Kelly Curran at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.