U.S. Banks
Issue in 2009 is loan losses
Mike Mayo, CFA
Research Analyst
(1) 212 250 2007
mike.mayo@db.com
Rob Rutschow
Research Analyst
(1) 212 2506600
rob.rutschow@db.com
Chris Spahr, CFA
Research Analyst
(1) 202 626 7035
chris.spahr@db.com
Fundamental, Industry, Thematic, Thought-Leading
Deutsche Bank Company Research's Product Committee has deemed this work
F.I.T.T. for investors seeking differentiated ideas. In this report, our bank team
takes a deep dive into the likely credit losses in the $7T of loans on US bank
balance sheets.
Deutsche Bank Securities Inc.
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FITT Research
Fundamental: industry loan losses are likely to increase from 1.5% to 3% of
total loans
We expect commercial bank loan losses to increase from 1.5% (3Q08) to 3% by
the end of 2010. Reasons include an increased percentage of loans with higher
losses (construction, credit cards, home equity), greater consumer leverage, and
sooner problem recognition by banks. About one-fourth of bank portfolios have so
far seen significant problems (particularly residential mortgage and construction)—
these problems are likely to continue, but the other 75% is likely to see an
acceleration in the pace of problems. We lowered our 2009 estimates on 16 large
commercial banks due to higher loan losses and these estimates are now about
one-third below consensus.
Industry: estimates are too high and internal capital generation may not be
enough to cushion losses
While the industry generates earnings (before taxes and loan loss costs) that can
almost cover industry loan losses of 3%, we think this protection will be pressured
by lower revenues in the near-term (given lower economic growth and consumer
spending). Moreover, additional securities losses or tougher requirements from
regulators and ratings agencies may constrain existing capital, potentially forcing a
bank to limit balance sheet growth and/or pay dividends. In other words, while in
aggregate the loan losses could almost be covered by on-going earnings, we
believe certain banks will have outsized losses relative to this cushion.
Thematic: rolling recession by asset class means mortgage problems are
likely to extend to cards and commercial
Relative to historical averages, industry loan losses are only ¼th of the way to the
estimated peak, with more progress in mortgage (est. ½ done) relative to
consumer (est. ¼th done) and commercial real estate and commercial (getting
started, aside from construction). To the extent there is a "last in, last out"
consideration, the year 2009 should see an acceleration in the pace of increase in
non-mortgage areas, reflecting a rolling recession by asset class, likely the main
factor hurting earnings.
Thought Leading: there is a reasonable chance that losses peak at a level in
excess of the peak of the Depression
The bank industry has taken on increased structural risk in addition to mortgages
that should become more apparent during the cyclical slowdown, leading to loan
losses that could exceed our estimate of 3% and surpass the 3.4% loss levels
reached in 1934 during the Depression. Either way, the industry is likely to reduce
risk taking to achieve greater long-term strength and stability even if it means
lower returns and less growth.

Table of Contents
Summary............................................................................................ 3
The mortgage market................................................................................................................8
The home equity market .........................................................................................................11
The commercial (C&I) market..................................................................................................13
The commercial real estate and construction market .............................................................21
The credit card industry ..........................................................................................................25
Other consumer loans ............................................................................................................30