Credit losses threaten bank recovery
Posted
Oct 16 2009, 08:28 PM
by
Anthony Mirhaydari
Rating:
The Dow Industrials tumbled back under the psychologically important 10,000 threshold on Friday after some surprisingly bad news from the banks jarred the bulls out of their complacency.
Bank of America (BAC) reported a third-quarter loss of $2.2 billion or 26 cents per share, falling below the consensus estimate of a 12 cent loss as its consumer credit portfolio continues to deteriorate. Similar problems plagued Citigroup (C) when it reported a 27 cent per share loss on Thursday. The results would've been even worse if not for some accounting trickery surrounding the amount of money set aside for future loan losses.
Remember that it was news the banks had returned to profitability back in March that got the equity rally going in the first place. Now, after a 53% rise in the Dow and a 146% increase in bank stocks as represented by the Financial SPDR (XLF), one wonders: Will the beleaguered financial system deal yet more damage to the real economy as loan growth is tightened and fresh losses recognized? It's too early to say, but the banks are already balking at plans to increase capital requirements. Moreover, there is evidence that the consumer loan delinquencies that have dampened Q3 results are about to get worse.
According to Credit Suisse analysts, an improvement in consumer credit loss rates is still over a year away given that losses didn't peak in the 1990 credit cycle until well after unemployment reached its zenith. This will come as a surprise to many, given the improvement in early stage delinquencies back in the spring and summer months. Some of this was probably tied to the payment "holidays" and other forbearance policies the banks put in place around this time that have since expired.
Seasonality is another factor, as the spring and summer months tend to have lower rates of delinquency. Unfortunately, we're entering a period of the year -- surrounding the back-to-school and holiday shopping seasons -- in which consumers tend to fall behind on their payments.
Given the data, I have a feeling the news flow out of the financial sector will take a turn for the worse over the next few quarters. No longer can the bulls depend on surprise profits from the banks to jolt the market higher during earnings season. They'll have to find another catalyst.
Disclosure: The author does not own or control a position in any of the funds or companies mentioned.
Anthony Mirhaydari is a researcher for the Strategic Advantage investment newsletter. He can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.
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