Remember a few months back when we were supposed to have turned the corner on the credit crisis? Oops. Despite another round of horrific writeoffs and stock drops, FBR thinks the banks still haven’t hit bottom.
In the coming months, FBR says, as consumers continue to feel pain on sagging employment, soaring energy costs, and tighter credit controls, banks will see their earnings deteriorate:
As we enter 2H08, it is apparent… that the consumer, and those who lend to them, will experience further deterioration over the next six to nine months, at a minimum, as increasing unemployment, higher food and fuel costs, lack of savings, and restricted access to credit, leave over-levered consumers with less ability to recover once delinquent… We believe that in response to the aforementioned ills, consumers, the driver for two-thirds of the economy, will reduce spending, and businesses will feel the impact, resulting in higher C&I losses and eventual increased CRE losses.
Of equal, if not greater concern is whether banks can continue to find investors willing to pony up cash to salvage their evaporating balance sheets:
Given the drubbing financials have taken this year, many investors are trying to decide whether current levels represent attractive risk/reward profiles and whether stock prices reflect the expected deteriorating credit environment over the next nine to twelve months. For the most part, those investors that must have some exposure to financials are placing sufficiency of capital as the primary investment criteria, with the acknowledgement that even those companies’ shares will probably get cheaper yet.