Institutional Risk Analytics downgraded the forward operating results of the U.S. banking industry from neutral to negative, primarily on the exceedingly dark outlook in housing and developments from the Federal Open Market Committee.
“What really drives our bearish macro outlook on financials is the continuing bloodbath in the housing sector with the Case-Shiller Housing Price Index now down eight consecutive months, and the announcement by the Fed yesterday regarding interest rates and quantitative easing,” said Christopher Whalen, managing director of the financial analytics firm in an advisory note this morning.
Under a section titled, “The Expanding Housing Sinkhole,” IRA said a mixture of macroeconomic pressures, notably rising fuel costs and sliding mortgage origination volumes, will likely pull down housing prices into the year.
And considering that many of the banks the IRA monitors hold significant mortgage servicing operations they remain inextricably linked to housing performance.
“The negative outlook for housing implies that bank revenue and earnings will remain under pressure for most if not all of 2011 and 2012,” the note reads, adding that the top four banks pulled billions out of loan-loss reserves to enhance income.
The IRA notes that revenue and margin weaknesses caused a retreat in large cap financials. A renewed rise in credit provisions may turn a tactical retreat into a wholesale selloff, it speculates.
“We remain concerned that a number of the largest banks are falsifying their public disclosure of credit losses in order to push down provision expense and thereby enhance short-term income,” the IRA said. “But an uptick in aggregate credit losses of the magnitude we now fear will make such legerdemain unsustainable.”
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