(Adds detail on government bank plan, sector risks, rating on PNC Financial)
NEW YORK, April 6 (Reuters) - Veteran banking analyst Mike Mayo on Monday weakened the optimism bolstering U.S. banking shares after he initiated coverage of the banks with an “underperform” rating, saying the sector’s problems still have further to run while government action may not help as much as expected.
Mayo, who recently transferred to to CLSA’s U.S. Broker-Dealer affiliate Calyon Securities (USA), highlighted the “seven deadly sins of banking,” which led to excessive risk taking in the sector.
“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,” the report said.
Mayo argued that the effect of these sins was to front-load earnings while pushing costs further down the line. Those costs are now more apparent and he says many of the current problems being experienced are only “midstream” and still have further to go.
Mayo expects the sector’s loan losses to increase from 2 percent to 3.5 percent by the end of 2010 given on-going problems with mortgages and accelerating problems in other areas, while earnings will continue to come under pressure.
“While mortgage losses may be half way to the peak, (credit) card and consumer losses may only be about one-third of the way and industrial and commercial real estate problems (except construction) seem in the early stages,” said the report.
“Loan losses, as a percentage of loans, will likely pass the level of the Great Depression,” Mayo said.
Mayo calls government intervention in the sector a “Catch-22” scenario where too little action could leave toxic assets on balance sheet, while overly tough action could trigger the need for large capital increases by the banks.
Below is a list of banks rated in the report:
* Bank of America (BAC.N) started with underperform rating
* Citigroup Inc (C.N) started with underperform rating
* JPMorgan Chase (JPM.N) started with underperform rating
* Comerica Inc (CMA.N) started with underperform rating
* Wells Fargo & Co (WFC.N) started with underperform rating
* BB&T Corp (BBT.N) started with sell rating*
* Fifth Third Bancorp (FITB.O) started with sell rating
* KeyCorp (KEY.N) with sell rating
* SunTrust Banks Inc (STI.N) with sell rating
* U.S Bancorp (USB.N) started with sell rating
* PNC Financial (PNC.N) started with underperform rating (Reporting by Edward Krudy; Editing by Theodore d’Afflisio)