Merrill Slashes Outlook for Banks

"We expect continued sizable loan loss reserve builds ... due to weakening credit quality as they all fall below reserves required under our reserve adequacy test," writes Vivek Juneja, an analyst at JPMorgan Chase.

"Loan loss reserves at our bank universe are rising, but still below the levels seen in the early 1990s during the credit cycle and also below the 2000-2003 cycle," he says. "Reserves were up to 1.7% of loans on average at March 31, for our banks, but this is below the 2.1% average from 1990-1994."

SunTrust and Wells Fargo have the lowest reserve ratios, among the banks Juneja covers. On the other hand, Wells Fargo has stronger capital ratios than SunTrust, he writes.

These days banks are feverishly pulling in the oars as the extended housing and credit crisis takes a toll on just about every size bank and begins to move past just residential real estate and creep into other parts of their loan portfolios.

These days banks are feverishly pulling in the oars as the extended housing and credit crisis takes a toll on just about every size bank and begins to move past just residential real estate, creeping into other parts of their loan portfolios.

Capital preservation has been of utmost importance for the banks over the past few quarters.

But bank stocks have floundered over the past few weeks, despite the myriad of capital injections by troubled banks such as Washington Mutual (WM Quote - Cramer on WM - Stock Picks), Wachovia and Nat City, to name a few, as investors worry about further credit losses.

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