Influential Bank Analyst Sees More Loan Losses Ahead

Shares of major U.S. banks fell Monday and pressured all the major averages after influential analyst, Mike Mayo, currently at Calyon Securities [CLSA] and formerly with Deutsche Bank, cautioned that loan losses in the sector are likely to grow more severe than they did during the Great Depression, and that the government may be forced to take over large lenders.

The CLSA analyst initiated coverage on U.S. banks with an underweight sector rating, “given the ongoing consequences of increased risk-taking by banks.” Mayo also said loan losses to total loans should increase to levels that top the 1930s. He expects loan losses to increase to 3.5%, and as high as 5.5% in a stress scenario, by the end of 2010. The highest level of loan losses in the Great Depression was 3.4% in 1934, according to the report.

“While certain mortgage problems are farther along, other areas are likely to accelerate, reflecting a rolling recession by asset class,” he wrote. [via Marketwatch] …

Mayo also said banks engaged in “seven deadly sins”: 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. Mayo sees the solutions to the banking crisis taking time, as the increase in risk happened over a decade or more. [via Bloomberg]

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