Any bank executive who thought analyst Michael Mayos exile from Wall Street would avert a bear season on bank stocks can think again.
A new round of problem loans at big banks and a sudden spurt of bankruptcy filings by U.S. corporations in a range of industries has intensified the spotlight bank profits have been under for the better part of the year. In turn, the generalized sense of uncertainty Wall Street had had regarding the banking industrys outlook has resolved itself into a far more specific set of worries. Susan Roth, the influential analyst who joined Credit Suisse First Boston when it bought Donaldson, Lufkin & Jenrette Inc., took a lead role in setting the negative tone for the group. Ironically, it was Ms. Roth who succeeded Mr. Mayo at Credit Suisse, where he had drawn much attention this summer for issuing almost unheard of sell ratings on Citigroup Inc. and J.P. Morgan & Co.
In a research note issued Wednesday morning, Ms. Roth said further downward pressure on bank shares is likely, and she estimated that a worst-case scenario could send share prices down by as much as 25%.
And Wednesdays market activity took several banking companies a fair portion of the way there. Financial shares swooned after the disclosure of large fourth-quarter credit losses at two of the biggest U.S. banking companies renewed the fear of deteriorating credit quality throughout the industry.
The American Banker index of 225 bank stocks fell 2.7%, and the Dow Jones industrial average rose 0.3%.
Shares of First Union Corp. and Bank of America Corp. tumbled for a second day, closing down 2.3%, at $26.5625, and 8%, at $42, respectively.
The Charlotte, N.C., rivals each said in quarterly filings with the Securities and Exchange Commission that they would probably have rising nonperforming assets in the fourth quarter, the result of their exposure to a single, large problem credit, widely believed on Wall Street to be the appliance maker Sunbeam Corp. The companies have also guided analysts to revise upward their estimates for chargeoffs in 2001.
A number of other companies, including SunTrust Banks Inc., FleetBoston Financial Corp., and Bank One Corp., said they expect higher nonperforming assets and loan chargeoffs in coming months due to a slowdown in the economy.
Even Bank of New York Co., which emphasizes its expertise in securities processing, is reporting credit problems. In its quarterly SEC filing, it said it had a $59 million exposure to an unnamed company that declared bankruptcy last month. Shares of the banking company fell 3%, to $54.8125.
This led analysts, even Ms. Roth, who already had been on the cautious side of the market consensus, to ratchet down their outlooks.
We thought we had been conservative in our expectations for bank earnings, generally, Ms. Roth said in her note. Taking into consideration the guidance from both First Union and Bank of America, that no longer looks to be the case.
That the Federal Reserve Board left interest rates unchanged Wednesday, as expected, did not help bank stocks. There is a sense that there is a growing crunch, said Nancy Bush, an analyst at Prudential Securities.
In a recent report, Goldman Sachs Group analyst Lori Appelbaum identified several troubled companies that may force banks to report additional credit losses this quarter. They include Owens Corning, which filed for bankruptcy protection this month, Federal Mogul, and W.R. Grace & Co. All three companies have problems with losses from asbestos.
Ms. Appelbaum named Bank of America, Bank One, Wachovia Corp., First Union, and Fleet as companies with the biggest potential exposures to these troubled companies; she estimated individual exposures at $150 million to $300 million. KeyCorp, Comerica, SunTrust, PNC Financial Services Group Inc., and National City Corp. are named has having lesser exposures to the same companies, ranging from $15 million to $30 million.
SunTrust of Atlanta said in its quarterly report that it anticipates higher levels of problem corporate loans, particularly to movie theater chains, textile firms, agribusinesses, and retail companies.
Its shares fell 5%, to $48.6875.
Unionbancal in San Francisco said in its quarterly SEC filing that management believed there are additional losses inherent in its loan portfolio. Its third-quarter net loan chargeoffs rose 61% from a year earlier.
We expect that nonperforming assets, chargeoffs, and provision expense may continue to rise as our borrowers become adversely impacted by the slowing economy and other factors, the company said. Its shares fell 0.8%, to $21.50.