Investors in bank stocks are getting increasingly impatient. Bank of America CEO Brian Moynihan was asked on a conference call with investors this week if it would be possible for the bank in future to average a 1 percent return on assets and 10 percent on equity. "In other words," Moynihan said, rephrasing the question, "can we earn enough to have this business make sense?" He added that the targets were achievable in a normal business cycle. "If you don't have that, you're not going to get investors to invest in this industry."
Mayo, whose upcoming book "Exile on Wall Street" examines the banking climate, says this year is on target to be the worst since 1938 in revenue growth for banks, and "that was before Europe, before the (S & P) downgrade. You lay on top of that those two events, that revenue growth looks even worse. The U.S. is showing a lighter version of what's taken place in Japan in the last 20 years."
A veteran banker said the debt downgrade is a lagging indicator that has woken people up to the underlying problem of debt in our banks and our economy.
"Leverage kills," agrees Robert Eisenbeis, chief monetary economist for Cumberland Advisors. He said U.S. banks are going to have to raise more capital and if they cannot, they may have to shrink.
"U.S. banks had too much debt and lent money to individuals who had too much debt," says Mayo. "All of a sudden our country seems to realize we have too much debt. It's lean times, but not desperate times."
Analysts agree that the failure of a major institution is not in the cards, though smaller regional banks are vulnerable. But their weakened financial state has a harmful ripple effect for the country as a whole."We've taken banks out of the picture in providing growth to the U.S. economy," says Bove.