FBR is out with a new report suggesting that losses from commercial credit are just starting to accelerate, and that large banks are particularly exposed. The firm notes that the losses taken so far don’t even match those taken during the early-90s recession, despite unemployment and credit quality indicators that have deteriorated much more sharply.
Here’s the abract of the firm’s report:
Commercial credit losses are likely to be quite onerous during 2009, something most bank investors are aware of; but the magnitude of the loss will be significantly larger than what most are expecting, driving ROEs lower than consensus and, ultimately, impacting valuations. We believe we are only in the very early stages of the business losses and, based on the recent sharp acceleration in
unemployment and the ultimate magnitude of the shift in unemployment (500+ bps from trough), the magnitude of losses should significantly exceed the prior two recession peak losses within the next six months; and the worst quarters could well be in late 2009—the infamous “kitchen sink” 4Q trend in the C&I category. We have been carefully tracking this development since November 2007 and, new to this report, is a deep-dive analysis regarding how a bank’s size is indicative of its losses—the smaller, the better, we have found. Regarding valuation, although consensus ROEs and valuation multiples have declined materially for C&I lenders in recent months, we contend that meaningful downside remains for both as the credit cycle deepens. With some of the worst macroeconomic
trends emerging since the mid-1970s recession, we are exercising patience in recommending buying banks, even at current valuations, which are at a steep discount to the long-term median. Within this report, we have updated our FBR C&I Risk Index and Heat Map, showing geographies and companies at more/less risk. Our analysis identifies those companies and regions that we believe are at
greatest risk of commercial credit deterioration, based on various macroeconomic trends (company valuation not considered). Within our bank coverage universe, we think the following companies are at elevated risk for future business loan problems: Comerica Incorporated, City National Corp., PNC Financial Services Group, SunTrust Banks, and Webster Financial; additionally, when considering valuation relative to risk, we highlight US Bancorp and M&T Bank as having above-average risk.
Business Insider Emails & Alerts
Site highlights each day to your inbox.