Bank on It! Credit Quality Issues Rear Their Ugly Heads Again

Credit quality questions have come back to haunt bank stocks.

Bank Stocks to Avoid as Credit Worries Mount

Junk-Bond Funds Face Growing Risk of Telecom and Tech Defaults

Mounting bad loans at First Union (FTU Quote)and Bank of America(BAC Quote) spooked the market this week. Federal Deposit Insurance Corp. head Donna Tanoue warned that U.S. banks face a greater risk of real estate loan defaults. Many bank stocks, both money center and regional, swooned. Perhaps most worrisome to banks, bond spreads -- i.e. the interest rate they must pay to bond holders compared to the Treasury rate -- have surged to levels not seen since the 1990-91 junk bond debacle; that move reflects fear about their financial future.

These are the worrisome events that caused Merrill Lynch bank analyst Judah Kraushaar today to write in a report, "Credit trends are clearly deteriorating in the banking/financial services industry in general. Non-performing assets on the commercial side bottomed about a year ago. We have now had a full year of accelerating non-performing asset growth and our sense from the banks is that this growth is continuing to accelerate. We are also seeing very wide credit spreads on non-investment grade bond issues, which we view as worrisome. Credit spreads today are as wide as they were in the fall of 1998, and we think that is very deflationary." ...