Senior Analyst Tom Mitchell of Miller Tabak suggests a bleak forecast for Western bank investing, at least for the near future. Real estate problems cause the analyst particular concern, as an uncertain amount of expected loan risk may heavily influence this environment.

“I think that the key is that balance sheets, where commercial real estate represents 100% or 200% of shareholders’ capital, are going to be subject to inherent volatility in the next six to 12 months,” said Mitchell, cautioning investors who will buy regardless of trends. “So we think that investors who think they want to own banks should be prepared for that volatility and plan to hold the banks through it if they’re going to own them in the first place.”

Mitchell closely watches real estate value trends and the affects on such companies as Zions (ZION), City National (CYN) and Wells Fargo (WFC).

“We like to see high-loss reserves relative to non-performing assets and troubled debt restructurings; we like to see high levels of capital and some indication that increases in non-performing assets have leveled off, even though the non-performing assets are continuing to grow,” said Mitchell, who expects economic fits and starts, concentrating on areas that had the most overbought real estate conditions but are now recovering.

“So that doesn’t leave us with a whole lot of candidates out there,” he said. “That’s sort of where we tend to suggest people focus at the moment because we don’t think it’s clear sailing ahead.”

However bumpy the road may get, Mitchell predicts investors in Western banks may find themselves a leg up on their geographic counterparts, potentially achieving better growth than the rest of the U.S. over the next 20 years.

This entry was posted on Thursday, March 11th, 2010 at 7:03 pm and is filed under General Investing. You can follow any responses to this entry through the RSS 2.0 feed.