Oppenheimer: Credit Crisis to Run Into '09

Analysts predict that large-cap U.S. banks will need to build up $170 billion-plus in reserves by the end of next year to protect against potential future losses on loans.
By Dan Freed ,

Oppenheimer & Co.'s Meredith Whitney, Kaimon Chung and Joseph Mack believe the current credit crisis will continue "well into 2009 and perhaps beyond."

In a report issued Monday, the banking analysts predict a massive reserve buildup by banks will hurt earnings. The report also predicts misguided moves by regulators will lead to a sharp drop in loans to consumers.

In a related move, Oppenheimer cut its estimates for credit card companies

Capital One

(COF) - Get Report

and

American Express

(AXP) - Get Report

on expectations of future losses and a drop in new business.

The report predicts that by the end of next year, the large-cap U.S. banks will need to build up more than $170 billion in reserves to protect against potential future losses on loans. The hoarding is already under way. In the first quarter, the banks covered by Oppenheimer built reserves by $10.6 billion, a 14% greater build than last quarter.

The defensive posture by banks represents a radical departure from where they were a year ago. In the first quarter of 2007, some institutions, including

Bank of America

(BAC) - Get Report

and Capital One, were releasing reserves. The report states that just like writedowns on bad loans, building reserves translates to lost revenue for banks.

On the regulatory front, Oppenheimer's analysts write that proposed rules from the

Federal Reserve Board

, the U.S. Treasury Department's Office of Thrift Supervision and the National Credit Union Administration will lead to a "'game changing' regulatory environment" that will make lending much less profitable. Oppenheimer expects credit card lenders to respond by cutting back on available credit lines by more than $2 trillion, resulting in a 45% drop in the amount of credit available to consumers.

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