Mayo says atonement is possible for the sinners, but it will mean banks embracing lower levels of risk, leverage, growth, returns and maybe even size

From Alphaville:

"Move over Meredith Posted by Neil Hume on Apr 06 16:19.

…there’s another bank slayer in town, and his name is Mike Mayo.

The former Deutsche Bank analyst has re-launched his coverage of the sector at his new employer, CLSA, with a note titled the ‘Seven deadly sins of banking’.

And Mayo, who was a virulent critic of ex-Merrill boss John Thain and anathema to Chuck Prince, can barely find a positive thing to say about the sector. Of the 11 banks he is now following all are rated either “sell” or “underperform” and his forecasts are also mostly below consensus.

He sees the sector lurching from one crisis (capital market losses) to another, more serious one (loan losses).
The impact of excessive risk, while already seen, still has more to go in our opinion, especially given a rolling recession by asset class. While mortgage losses may be half way to the peak, card and consumer losses may only be about one-third of the way and industrial and commercial real estate problems (except construction) seem in the early stages. Loan losses, as a percentage of loans, will likely pass the level of the Great Depression. Other pressures to income should include lower revenues (less loans and fees), higher expenses (more oversight costs), and dilution of shares outstanding (insufficient capital), likely leading to ongoing earnings shortfalls through 2010. Per the balance sheet, banks will likely need a permanently higher capital and reserve levels, implying lower ROEs and less reserve releases when the cycle is over.

The losses are, of course, a consequence of the ‘Seven deadly sins of banking’, all of which Mayo says were committed, sometimes on an unprecedented scale, by US banks over the past 10-15 years.
The seven deadly sins of banking are ways that US banks increased risk to generate revenues. These actions front-loaded earnings and back-ended costs, the brunt which is being felt today. These “sins” were not created in a day but typically over 10-15 years. In almost each case, the extent of the transgression, meaning excessive risk, could be described as somewhere between the worst in a decade and the worst ever.

Below is our list with a summary of the issue:
Greedy loan growth - once in a generation excess.
Gluttony of real estate - historic asset concentration.
Lust for high yields - loan losses exceed Depression (est.)
Sloth-like risk management - highest ever consumer debt.
Pride of low capital - lowest level in 25 years.
Envy of exotic fees - exotic turns toxic w/$400 billion of charges.
Anger of regulators - consequences of past lobbying.

Mayo says atonement is possible for the sinners, but it will mean banks embracing lower levels of risk, leverage, growth, returns and maybe even size.

Over the long term there is a real possibility that the regulatory pendulum swings all the way back to 1934, whether via a reenactment of Glass-Steagall, a new way of measuring market concentration (not only deposits), or other moves that lead to a break-up of certain large banks. Even short of this, there is a chance that banks move in the direction of becoming more akin to large public financial utilities.

Related links:
Meredith Whitney speaks on bank profitability - FT Alphaville

This entry was posted by Neil Hume on Monday, April 6th, 2009 at 16:19 and is filed under Capital markets, People. Tagged with mike mayo."

Me:

Don the libertarian Democrat Apr 6 20:30

"The impact of excessive risk, while already seen, still has more to go in our opinion( ? ), especially given a rolling recession by asset class. While mortgage losses may be ? ) half way to the peak, card and consumer losses may( ? ) only be about one-third of the way and industrial and commercial real estate problems (except construction) seem( ? ) in the early stages. Loan losses, as a percentage of loans, will likely( ? ) pass the level of the Great Depression. Other pressures to income should( ? ) include lower revenues (less loans and fees), higher expenses (more oversight costs), and dilution of shares outstanding (insufficient capital), likely ( ? )leading to ongoing earnings shortfalls through 2010. Per the balance sheet, banks will likely( ? ) need a permanently higher capital and reserve levels, implying( ? ) lower ROEs and less reserve releases when the cycle is over."

Too many qualifiers. Why is "underperform" a terror? Oh well, here are the seven deadly virtues of banking:

MORDRED
The seven deadly virtues, those ghastly little traps
Oh no, my liege, they were not meant for me
Those seven deadly virtues were made for other chaps
Who love a life of failure and ennui
Take courage-now there's a sport
An invitation to the state of rigor mort
And purity-a noble yen
And very restful every now and then
I find humility means to be hurt
It's not the earth the meek inherit, it's the dirt
Honesty is fatal, it should be taboo
Diligence-a fate I would hate
If charity means giving, I give it to you
And fidelity is only for your mate
You'll never find a virtue unstatusing my quo or making my Beelzebubble burst
Let others take the high road, I will take the low
I cannot wait to rush in where angels fear to go
With all those seven deadly virtues free and happy little me has not been cursed