U.S. banks face one-two credit punch

By Tim McLaughlin - Analysis

NEW YORK (Reuters) - Wall Street and big U.S. banks should be wary of cash-strapped consumers. And they should not relax after writing down the value of leveraged loans and other assets by billions of dollars.

Some analysts say more whopper write-downs are coming.

Hit hard by an evaporating market for the corporate debt that fueled a globe-girdling buyout boom, U.S. banks now look forward with trepidation at escalating problems, such as consumers missing payments on their automobiles and credit cards. The consumer safety cushion, raising cash by refinancing their mortgages, is losing air as banks restrict lending more and more while adjustable-rate loans reset at higher interest rates.

Bernstein Research analyst Brad Hintz said it was the worst fixed-income sales and trading quarter for four of the five largest U.S. security firms in nearly a decade. Bear Stearns Cos Inc BSC.N, Lehman Brothers Holdings Inc. LEH.N, Morgan Stanley (MS.N) and Merrill Lynch & Co Inc MER.N combined for billions of dollars in write-downs of their portfolios.

Some analysts are skeptical that such a significant credit crisis can be worked through in just a quarter or two.

"There will be further write-downs of portfolio holdings," said Keith Davis, a financial analyst at portfolio manager Farr Miller & Washington.

The confluence of shriveled demand for corporate debt and consumer debt problems has set the stage for a one-two punch. That could knock Citigroup (C.N) Chief Executive Chuck Prince out of a job and smudge the shine on the rising star of JPMorgan Chase & Co (JPM.N) CEO Jamie Dimon.

"You are looking at a situation where banks are under-reserved for the losses that are out there," Davis said.

After years of drawing down the money they set aside for anticipated loan losses, the banks will have to rebuild those reserves, cutting into profit, Davis said.

He said consumer loss levels currently carried by banks are far below what they will be several quarters from now. "I don't see how banks can grow earnings next year," Davis said.

Meanwhile, JPMorgan's Dimon warned this week that a roughly $80 billion superfund being created to rescue assets held in structured investment vehicles, or SIVs, won't be enough to help everyone. There are more than $300 billion worth of assets in those SIVs.

"There may be some SIVs that it's not going to help, and that's life in the fast lane," Dimon told analysts.

While Citigroup scrambles to keep its SIV exposure off its own balance sheet, the No. 1 U.S. bank's provision for loan losses increased in the third quarter to $4.8 billion, up from $2.52 billion in the previous quarter.

Still, analysts are worried about further credit deterioration for regional banks and Wall Street heavyweights.

"We continue to be concerned by the rate of credit deterioration across a number of (Washington Mutual Inc's WM.N) portfolios, which will likely constrain earnings for the remainder of 2007 and into 2008," Credit Suisse analyst Moshe Orenbuch said.