Mr. Green: I think that's absolutely true. Over the past two weeks we have seen tremendous volatility, with stocks re-testing January lows, only to bounce back by 10%-15% a week later. Investor sentiment remains quite negative, with most bank stock aficionados concerned about the unraveling of a recession like the one that crippled bank stocks from 1989-1991. We believe the trading pattern will remain very volatile based on the natural flow of good and bad news. In our opinion, this is still going to be a year where credit quality deteriorates over the course of the year. I don't think in the past two quarters that the banking system has recognized all the credit quality issues that have developed from the sins committed over the past five or six years; also, it will take the banking system, and financial services in general, reducing the leverage inherent in their balance sheets. The amount of leverage usually increases when very good economic times persist for a number years. For the vast majority of banks, credit losses have been benign for the past 15 years and nonexistent for the past three or four years. Therefore, it is not too surprising that credit underwriting practices have become a little more lax or that pricing has been squeezed to exclude much of a credit risk spread. Clearly, the oversupply of residential housing, coupled with softer consumer demand, will likely weigh on real estate values for the better part of this year. As a result, I think we are going to see everybody's earnings results reflect at least a normal credit environment. For a group of others that were particularly aggressive in growing their residential construction and development lending businesses, we will see very significant recapitalizations and regulatory action. The market seems to be assuming that, given that we've basically seen the typical bank stock fall by 30% or 40% over the past year. The handful of bank stocks that have held up the best reflect minimal concern about a) the strength of their capital, b) their credit quality, and c) the liquidity of their balance sheets. The Midwest, oddly enough, has quite a few of those banks, particularly if you exclude Michigan and Ohio. Again, excluding Michigan and Ohio, the Midwest should weather the forthcoming credit quality storm relatively well compared to the West Coast and parts of the Southeast. In the Southeast, banks in Georgia and Florida will show dramatic deterioration in their credit quality, given the significant overbuilding of residential housing and lot development in their markets.
Tickers included in this excerpt: ASBC, CMA, CORS, HBAN, KEY, PVTB, SBNY, UMBF
For more information call (212) 952 7433. The Wall Street Transcript does not endorse any of the comments made by interviewees, and does not make stock recommendations.