THE RATINGS GAME: Bank Shares Fall As Mayo Gets Biblical On Sector

By Alistair Barr

SAN FRANCISCO (Dow Jones) - Bank analyst Mike Mayo went biblical on the sector Monday, predicting loan losses will probably exceed Great Depression-era levels as the industry is punished for succumbing to the seven deadly sins of gluttony, greed, lust, sloth, wrath, envy and pride.

Mayo, a former Deutsche Bank analyst now with Calyon Securities, passed judgment on the banking industry with an underweight rating.

Shares of Bank of America (BAC), Citigroup (C), J.P. Morgan Chase (JPM), Wells Fargo (WFC), PNC Financial Services (PNC) and Comerica (CMA) will underperform, the analyst foretold.

Mayo commanded investors to sell shares of US Bancorp (USB), SunTrust (STI), Fifth Third (FITB), KeyCorp (KEY) and BB&T (BBT).

"We are initiating on U.S. banks with an Underweight sector rating given the ongoing consequences of increased risk taking by banks in seven different areas," spaketh Mayo in a note to investors.

"The seven deadly sins of banking include greedy loan growth, gluttony of real estate, lust for high yields, sloth-like risk management, pride of low capital, envy of exotic fees, and anger of regulators," quoth Mayo.

"A key implication is that loan losses (to total loans) should increase to levels that exceed the Great Depression," the analyst foretold. "While certain mortgage problems are farther along, other areas are likely to accelerate, reflecting a rolling recession by asset class."

Loan losses to loans will likely increase from 2% to 3.5% by the end of 2010 given ongoing problems in mortgage and an acceleration in cards, consumer credit, construction, commercial real estate and industrial, the analyst warned.

Government intervention might not help as much as expected, especially given that loans have been marked down to only 98 cents on the dollar, on average, Mayo added.

Bank stocks fell during late morning action, with J.P. Morgan losing 2.6%, Bank of America down 0.7%, Citi off 3.2% and Wells Fargo down 5.5%.

Shares of other large banks such as PNC and KeyCorp lost more than 5%.