By the end of next year U.S. commercial banks have "a reasonable chance" of suffering higher loan losses than they did during the Great Depression, according to Michael Mayo, a banking analyst at Deutsche Bank AG.
Consumers currently are stretched even more than they were in the past, "even before factoring in potential job losses," Mr. Mayo wrote in a report issued Monday.
Loan losses at commercial banks peaked at 3.4% of loans in 1934, five years into the Depression, according to government data Mr. Mayo compiled. The comparable figure for the third quarter of last year, the most recent period for which data is available from the Federal Deposit Insurance Corp., was 1.5%.
Mr. Mayo estimated that the rate will double by the end of next year, to 3%.
It may go even higher, because the banks face "increased structural risk" from the growth of credit cards, home equity borrowing, and construction loans, he wrote. "Either way, the industry is likely to reduce risk taking to achieve greater long-term strength and stability, even if it means lower returns and less growth."
In separate reports, Mr. Mayo cut earnings estimates for two of the country's biggest banking companies, JPMorgan Chase & Co. and Citigroup Inc., citing his expectation for increased loan losses at both companies.
He slashed his fourth-quarter estimate for JPMorgan Chase by 53 cents, to 18 cents a share, including a one-time gain of about 19 cents from the breakup of Chase Paymentech Solutions LLC, the New York company's joint venture with First Data Corp.
Since the beginning of the financial crisis, JPMorgan Chase has taken $20.5 billion of writedowns, losses, and credit provisions — far less than Citigroup and Wachovia Corp., which Wells Fargo & Co. acquired last week.
"Worsening economic trends should put additional pressure on JPMorgan Chase's loan portfolios (especially cards, home equity, and residential and commercial mortgage)," Mr. Mayo wrote.
He also lowered his earnings estimates for the company for this year and next year. He has had a "hold" rating on the stock since the beginning of last year.
Mr. Mayo lowered his estimates for Citi by 30 cents for year, to a loss of $1 a share, and by 40 cents for next year, to a profit of 75 cents. He cited higher loss rates and lower revenue than previously expected.
"Worsening economic trends should put pressure on Citigroup's loan portfolios," Mr. Mayo wrote in a note.
Credit cards, U.S. residential and commercial mortgages, and international consumer banking will be hit especially hard, he wrote.