Banking: So Many Questions and So Much Uncertainty

What does the future hold for our banking industry? Will it be ‘business as usual,’ as some on Wall Street might like? Will the populist rage sweeping the country compel those in Washington to enact meaningful reform? Will credit loosen? Will housing stabilize and support increased lending by banks? How many banks will close? So many questions and so much uncertainty. While we can make projections on all these fronts, let’s tap into the minds of those who monitor developments in banking on a daily basis.

The American Banker is the banker’s bible when looking for cutting edge analysis and perspectives. Today, this fabulous journal brings us over the wall and into the minds of top rated banking analysts on Wall Street. Let’s navigate, 2010 Outlook : Red Tape, Housing Could Impede Banks’ Recovery:

The banking industry may be on the mend, but its recovery could be hindered by heavy-handed regulation and more pain in the housing market, among other things.

That was the consensus of three banking analysts who participated in an American Banker roundtable late last month in New York.

The veteran market watchers — Anthony Polini of Raymond James, David Hendler of CreditSights Inc. and David Ritter of Argus Research Co. — said the worst of the financial meltdown may be over, but banks are still facing heavy losses and depressed profits, particularly if the government gets carried away with financial and other reform efforts.

In my opinion, these analysts provide a mix of thoughtful insights combined with industry bias. That said, the overall review is compelling. Let’s touch on a few major themes.

1. Consumer Banking

Hendler, CreditSights’ head of U.S. financial services, said potential new consumer rights laws could cut into profits by forcing lenders to provide more low-fee, low-rate basic banking products to middle-class and poor people. This kind of “social policy lending” could “have a big impact on the traditional retail, branch bank systems,” Hendler said. “Why should banks be providing all these access points to people that they do not really make much money off of? It does get some liquidity, but it may cost too much.”

2. Housing

Ritter, director of financial services research at Argus, said government intervention in the housing sector could be postponing inevitable pain or could inadvertently revive old problems.

“There are just unprecedented government subsidies out there right now, first for the housing market. And it isn’t just the tax credit and the fact that mortgage rates are probably artificially low because of quantitative easing,” Ritter said. “Then aside from that you’ve had this massive explosion now of FHA loans. It’s being done to prop up the housing market and the broader economy for sure, but many of the same practices that got us into this mess in the first place are being done again now by the FHA with low-down-payment loans and relatively easy approvals.”

3. Embedded Losses in the Banking Industry

Hendler said the banks could face $500 billion to $1 trillion more in mortgage losses. People with good credit who bought a house at the height of the bubble are having trouble making payments, he said, thanks to rising unemployment.

“My view is that the prime residential mortgage crisis is probably going to require another massive government assistance program in that range of half a trillion [dollars] or more,” Hendler said. “And if this program is extended, it will lead to more bank regulatory restrictions with more capital and higher prudential liquidity levels. This would reduce the banks’ appetite and ability to take lending risks and put pressure on profitability.”

4. How Many Banks Will Fail?

Hendler expects “600 to 1,200″ banks to fail in the next two years. The large banks that passed the government stress test are well positioned to handle the “lagging phases” of the recession, he said. But regional banking companies sensitive to local real estate trends, such as Zions Bancorp. and Marshall & Ilsley Corp., face tougher challenges, especially if economic trends take a bad turn. Some regionals might become acquisition targets, he said. Many community banks are still vulnerable to real estate and economic problems, too.

While many market analysts and government pundits get caught up in the daily machinations and market swings, I believe it is imperative we keep our eye focused further down the economic landscape.

About Larry Doyle 522 Articles

Larry Doyle embarked on his Wall Street career in 1983 as a mortgage-backed securities trader for The First Boston Corporation. He was involved in the growth and development of the secondary mortgage market from its near infancy.

After close to 7 years at First Boston, Larry joined Bear Stearns in early 1990 as a mortgage trader. In 1993, Larry was named a Senior Managing Director at the firm. He left Bear to join Union Bank of Switzerland in late 1996 as Head of Mortgage Trading.

In 1998, after 15 years of trading and precipitated by Swiss Bank’s takeover of UBS, Larry moved from trading to sales as a senior salesperson at Bank of America. His move into sales led him to the role as National Sales Manager for Securitized Products at JP Morgan Chase in 2000. He was integrally involved in developing the department, hiring 40 salespeople, and generating $300 million in sales revenue. He left JP Morgan in 2006.

Throughout his career, Larry eagerly engaged clients and colleagues. He has mentored dozens of junior colleagues, recruited at a number of colleges and universities, and interviewed hundreds. He has also had extensive public speaking experience. Additionally, Larry served as Chair of the Mortgage Trading Committee for the Public Securities Association (PSA) in the mid-90s.

Larry graduated Cum Laude, Phi Beta Kappa in 1983 from the College of the Holy Cross.

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