Banks Continue to Stuff Loan Cushions

The hits that banks have taken from the subprime mortgage crisis may be relenting, but the tab from the credit crunch is far from tallied, banking executives say.

Banks across the country from Wells Fargo(WFC) to SunTrust Banks(STI) have already seen earnings sapped as they bulked up reserves to cover loan losses.

With many experiencing increasing delinquencies in consumer debt, including home-equity loans -- particularly ones made by third-party brokers -- credit cards and auto loans, executives say they're likely to step up the money they set aside to cover defaults.

The situation is becoming more dire as market observers and analysts acknowledge that the credit cycle and housing downturn are likely to last at least through next year. The state of the U.S. consumer "grows worse by the month," according to Oppenheimer analyst Meredith Whitney.

"Our view is that the credit crisis will extend well into 2009 and perhaps beyond, and although the complexion will change, the net effect will be the same: three years of multibillion dollar revenue reversals," Whitney writes in an industry note Tuesday. "We estimate that by the end of 2009, over $170 billion of reserve builds will flow through bank earnings on top of 'business as usual' loan loss provisions."

She remains cautious on financial stocks "as credit turns this early in the credit cycle signal to us that ultimate loss experience will be far worse than current expectations," Whitney wrote in a separate note last week.

Analysts also are pointing to commercial real estate loans -- particularly those made to residential real estate builders -- as another area of increasing concern. Banks, particularly in the Midwest and Southeast, have been hit by rising losses from loans to homebuilders as home prices slide.