Credit crisis ‘far from over’; Merrill urges consolidation

The credit crisis is “broad, deep and global” and “far from over” for financial companies even after they reported $500 billion in write-downs and credit losses, Merrill Lynch & Co.’s chief investment strategist said.

“Investors are significantly underestimating both the scope and the extent of the credit bubble and the consequences of its subsequent deflation,” Richard Bernstein wrote in a note to clients. “The problems are not confined to large institutions that are overexposed to U.S. subprime loans.”

The lingering effects of the crisis mean banks and brokerages need “massive” consolidation because of the glut of lending capacity worldwide, Mr. Bernstein said.

Profit for U.S. banks and brokerages tumbled 94 percent in the second quarter from a year earlier, according to Bloomberg data. Financial stocks in the Standard & Poor’s 500 Index have tumbled 30 percent this year for the worst performance among 10 industry groups.

The KBW Bank Index, a composite of 24 U.S. banking stocks, fell 4.1 percent today. Financial companies in the S&P; 500 fell 3 percent for the biggest drop among 10 industry groups.

The stocks aren’t likely to rebound soon, Mr. Bernstein wrote.

“The problems in the financial sector appear to us to be far from over,” he wrote. “We are skeptical that trying to bottom-fish will prove profitable.”

One of the largest banks in Asia recently posted an earnings shortfall from losses on mortgage-related collateralized debt obligations and other troubled assets, showing the crisis has spread, Mr. Bernstein wrote. The pace of initial public stock offerings in India and Singapore has dropped “considerably.”

“The sector’s underperformance clearly has been a global phenomenon,” Mr. Bernstein wrote. “History shows that the U.S. tends to lead the world into slowdowns and recessions.”

The worst might still be ahead for smaller U.S. banks, he wrote.

Banks and brokerage firms worldwide have recorded more than $500 billion of securities write-downs and increased costs related to bad loans, according to Bloomberg data.