As banks get to eat more real-estate losses, shareholders about to get killed

Jun 13 2008

As banks get to eat more real-estate losses, shareholders about to get killed

Posted by: admin in Real Estate and Housing

Filed under: Earnings reports, Bad news, Wachovia Corp (WB), Wells Fargo (WFC), Housing

Some analysts thought that once banks moved though their bad bet on subprime paper, they might begin to see improvements in their earnings. Not so fast. Plain old loans for houses and condos are going bad so fast that lenders are about to get hit again on the bottom line.

The Wall Street Journal points out in one of it top stories that “Federal regulators warned Thursday that banking-industry turmoil would continue as financial institutions come to terms with piles of bad loans they made to finance the construction of homes and condominiums.”

Many investors might state that the information is obvious, and that it was expected that falling real-estate prices would injured banks. But the real victims may be bank shareholders. As huge lenders take more losses on their portfolios, they’ll have to raise more capital and further dilute shareholders. Banking stocks which are down two-thirds from their highs could drop even further.

Now that banks are selling off these big loans, the quarterly reports for companies like Wachovia (NYSE:WB) and Wells Fargo (NYSE:WFC) are about to get hammered again. Wachovia trades at below $22, down from a 52-week high of more than $54. Wells Fargo has fallen from a 52-week high of nearly $38 to $27. Regional banks like National City (NYSE:NCC) have had it worse. It shares have fallen from a one-year high of $34.62 to $5.25.

Selling in those stocks in not over. Not even close.

Douglas A. McIntyre is an editor at 247wallst.com and author of the Ten Stocks Under $10 letter.