Whitney Says Stress-Tested Banks Are ‘Overvalued’
By Michael J. Moore
May 11 (Bloomberg) -- U.S. bank stocks are “grossly overvalued” after government stress tests overestimated future earnings, said Meredith Whitney, the former Oppenheimer & Co. analyst who predicted a slide in the companies’ shares.
First-quarter earnings were inflated by government assistance, and profits in 2010 and 2011 will fall below consensus estimates, Whitney said today in a CNBC television interview.
“The underlying core earnings power of these banks is negligible,” Whitney said. The recent rally in bank stocks is “based on no fundamental improvement,” she said.
Results from U.S. stress tests on the 19 largest U.S. financial companies showed 10 need $74.6 billion in additional capital to survive a longer, more severe recession. The banks have until June 8 to develop capital-raising plans and Nov. 9 to implement them, the Federal Reserve and other regulators said in a statement last week.
Whitney, who left Oppenheimer this year to form New York- based Meredith Whitney Advisory Group, said she wouldn’t advise short-selling bank stocks because of the government’s influence. She also said she wouldn’t own the stocks because many banks are sitting on “rotting assets.”
Credit Cards
The decline in securitization markets and changes to laws regulating credit cards will weigh on banks’ ability to generate profits, Whitney said. Revenue from asset management will also decline from peak levels, she said.
“Some of these business models are never going to come back,” Whitney said. “There are so many businesses within the banks that are going to have lower revenue streams with the same expense base.”
The stress tests, which predicted a 10.3 percent unemployment rate under its “more adverse” scenario, underestimated peak unemployment, she said. Last month, Whitney said unemployment will rise “well into the double digits.” The rate in April jumped to 8.9 percent, the highest level since 1983.
Whitney advised short-selling retail and consumer discretionary companies as more jobs are cut and consumer spending declines.
“You’re still going to see a massive contraction in consumer liquidity,” she said. “Credit contraction is happening at an accelerated pace, so how does the consumer go out and feel good and spend? More people are going to lose their jobs and have less room on their credit lines to spend. That’s a ruse that no great government momentum train can bypass.”
Whitney said today banks will probably have to raise capital again, and that many will sell businesses into joint ventures, which will be opportunities for investors.
“I would still be holding onto cash because I think later in the year there are going to be great assets that come up for sale, wholesale assets, franchise assets that you can buy as opposed to buying an overvalued stock here,” she said.
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