Many of the recent fixes in the financial sector are merely "window dressing" and problems still persist in the sector, says Michael Mayo, a former Deutsche Bank analyst who now works for CLSA's Calyon Securities.
Mayo, who is widely respected for his timely calls in the sector, remains negative on the sector and is starting coverage at Calyon with "sell" or "underperform" ratings on 11 traditional U.S. bank stocks. His earnings forecasts for the sector also are below the average estimates of other Wall Street analysts.
Mayo expects loan losses to continue escalate to a level that exceeds the Great Depression, he said in a research note entitled the "Seven Deadly Sins of Banking."
"While certain mortgage problems are farther along, other areas are likely to accelerate, reflecting a rolling recession by asset class," Mayo says, in the research note. "New government actions might not help as much as expected, especially given that loans have been marked down to only 98 cents on the dollar, on average."
Mayo expects the recession to persist and to put further pressure on commercial real estate loans.
Loan losses could accelerate from 2 percent to 3.5 percent by year-end 2010 given ongoing problems in mortgage and an acceleration of troubles in cards, consumer credit, construction, commercial real estate and industrial, he predicts.
He is particularly worried about $7 trillion in bank loans covering mortgage, consumer and commercial real estate that the public private partnership doesn't begin to fix.
According to Mayo, the changes in mark-to-market accounting rules "changes the optics," but doesn't change the underlying fundamentals of the banking business.
Although Mayo expects upcoming earnings reports from the banks to be better than in the fourth quarter, there will still be problems with the asset quality. He expects this quarter to mark a transition from the financial crisis, which was characterized by billions of dollars in writedowns, to an economic crisis, which will be marked by loan losses.
At the moment, Mayo's coverage does not include ratings for Morgan Stanley (NYSE: ms) and Goldman Sachs (NYSE: gs).
Bank of America (NYSE: bac), Citigroup, JPMorgan, Comerica (NYSE: cma), and Wells Fargo (NYSE: wfc) all received underperform ratings, while BB&T (NYSE: bbt), Fifth Third Bancorp (NASDAQ: fitb) , KeyCorp (NYSE: key), SunTrust (NYSE: sti), and US Bancorp (NYSE: usb) all received sell ratings.