April 6, 2009, 4:45 PM
The History of Mike Mayo Bank Downgrades
http://blogs.wsj.com/deals/2009/04/06/the-history-of-mike-mayo-bank-downgrades/
By Heidi N. Moore
Calyon analyst Mike Mayo’s bank-sector downgrade today struck terror into the hearts–and stock prices–of 11 banks, including Wells Fargo, BB&T, KeyCorp, Suntrust Banks, and PNC Financial Services. Some of the bank stocks fell as much as as 7% on Mayo’s call.
Mayo’s call comes just as the markets were showing some optimism about banks. Raymond James analyst Anthony Polini noted just last Tuesday, “After several weeks of heightened fear, short selling, and capitulation, banks stocks have rallied for three consecutive weeks despite high levels of political and economic risk….we may have finally established a hard bottom for these stocks….We believe the biggest risk to a sustainable rally is government intervention.”
Mayo also is worried about government intervention, but mostly that it won’t do enough. Mayo expects loan losses at the banks to be as bad as the Great Depression by 2010.
Mayo’s downgrades are something of a Wall Street tradition. In 1999, when he was working for Credit Suisse First Boston, Mayo told investors to sell every bank stock they owned. The controversial call made Mayo unpopular, to say the least. A rival analyst jeered him as “Mayo-naise” and brokers posted his face on dartboards. In September 2000, Credit Suisse fired Mayo and seven members of his team after the bank’s acquisition of Donaldson Lufkin & Jenrette, which had its own bank research team led by Susan Roth Katzke, who remains at the firm.
In 1992, Mayo, then at UBS, made a bearish call on Wells Fargo. Mayo expected the stock to hit $56 a share, while other analysts predicted as much as $180 a share. Mayo’s primary concern was Wells Fargo’s real-estate loans in California, which he felt would lead to losses because 66% of Wells’ portfolio was in hard-hit Southern California. Three months later, Wells Fargo’s quarterly profit dropped 72%, largely due to a $400 million loan-loss provision.
In 1994, as Fortune wrote, “Back in December 1994, when bank stocks were drearily trudging through a bear market, Mayo saw the bottom near and pointed investors up. Saying the sector had turned a corner and would be propelled by cost savings and merger mania, he shouted “Buy!” across the board. His gutsy move left more established analysts scratching their heads. But the call, it turns out, was as good as money in the bank. Within a month the group’s stocks had reversed course. And over the next few years Standard & Poor’s bank index would post a total return of 254%.”
In May 1999, Mayo rode the downgrade train again with the big shocker: he marked down Citigroup, Chase, Bank One and J.P. Morgan to a “sell” rating. Sister publication Barron’s magazine wrote then, “Mayo, however, is a maverick who’s willing to risk offending bank management. Mayo’s concerns about the banks include stalled cost-cutting gains, asset-quality deterioration, waning capital-markets revenues and Year 2000 issues. He said that while bank P/Es look reasonable, the earnings outlook has become less certain.”
In July 1999, Mayo downgraded eight more regional banks, bringing the downgrade total to 34 banks in 14 months. Mayo’s concerns included loan deterioration. “Mr. Mayo is the only analyst with a major firm to take such a negative and wholesale approach to the industry,” the American Banker wrote at the time. Fortune later wrote of Mayo’s 1999 call, “If his 1994 call identifying the end of the bank slump had been strikingly prescient, his call at the top was the equivalent of hitting a hole in one at the Masters…. Within a month of the call, the sector began a chilling descent, triggered by the interest-rate hikes Mayo had forecast.”
In July 2000, Mayo was still bearish. The Economist wrote of his research, “Michael Mayo, until recently the top banking analyst for Credit Suisse First Boston, thinks that leveraged lending has been responsible for the recent increase in bad or problematic loans at a raft of American banks, including Bank of America, FleetBoston Financial, Bank One and Wachovia.” By then, Mayo had established loan exposure as a major warning sign for banks’ health — and, fast-forward to seven years later, it played a part in the credit crisis.
In September 2000, Mayo was let go from Credit Suisse. In October, he was ranked No. 2 in the closely watched Institutional Investor rankings of bank analysts.
In February 2001, Mayo found a new home at Prudential Securities. By April, he had gathered a clutch of “sell” ratings on 18 of the 34 major banks he followed. The Bergen County Record reported, “Mayo, formerly of Credit Suisse First Boston, said in a report that FleetBoston and the others outdid themselves in the 1990s, and that the group’s earnings would slow to about 7 percent a year this decade, or roughly half of last decade’s pace. He blames a slower economy, growth in bad loans, and smaller gains in efficiency than were realized in the 1990s.” Mayo’s call was a bit off there, since bank stocks grew far more in value during 2001 to 2006.
In June, he made waves by slapping a “sell” on J.P. Morgan Chase. He turned out to be on to something: “The stock fell nearly 10% that week and dived again days later, when the bank announced dud commercial loans had risen by $1 billion,” BusinessWeek wrote. In August, he also downgraded Bank One to a “sell” and kept it there for about a year, raising the ire of then-executive Jamie Dimon.
In September 2002, Citigroup’s stock fell 10% in one day — a $17 billion loss in stock value –when Mayo put a sell rating on that stock in fear that Enron and WorldCom litigation would hurt the bank’s earnings. The American Banker reported that Mayo had “downgraded Citigroup because it had surpassed his $48 target price even as the risks in the financial services business have increased after the Sept. 11th terrorist attacks. He cited concerns over capital markets volatility, the company’s exposure to Latin America, problem corporate loans, higher consumer losses, and slower revenue growth.” Citigroup later reported $3.18 billion in net income for the quarter, a 9% drop from the year before. It also saw its stock price stagnate over the next five years.
In Nov. 2002, former bank analyst Thomas Brown “lambasted the bearish Mayo on his popular Bankstocks.com Web site: ‘I can’t recall a time in the past 20 years when I’ve disagreed with another analyst as emphatically, and in such detail,’ Brown wrote.
In January 2004, new J.P. Morgan executive Jamie Dimon took aim at Mayo. Newsday wrote, “Mayo, who has long had a reputation on Wall Street for being tough on the companies he covers, had been bearish on Bank One since May 1999. So, as shares in Bank One soared after the deal was announced, Dimon sought vindication. ‘Mike Mayo has had Bank One for ‘sell’ since the day I got there,’ Dimon observed, before suggesting that Mayo include these three words in his next report: ‘I was wrong.’” In November 2004, Mayo cut his 2005 estimates for J.P. Morgan Chase twice in two weeks. J.P. Morgan’s stock, however, which was challenged under former CEO Bill Harrison, kept rising after Dimon took over.
The year 2007 brought a new set of warnings and downgrades. In September 2007, Mayo reduced his earnings estimates on Bear Stearns, and later on Citigroup. As the Economist noted, “Michael Mayo of Deutsche Bank worries that Citi may be entering an ‘information and management vacuum: its newly installed fixed-income heads are untested, its temporary boss is an unknown quantity (in America, at least) and it is not planning to offer another financial update before mid-January.” Bear Stearns and Citigroup soon fell on hard times — Bear Stearns within a few months, and Citi within the year.
In October 2007, Mayo became more aggressive, as our colleagues reported: “Merrill provided more detail than in the past about its current holdings of $15.2 billion in asset-backed collateralized debt obligations, or CDOs, which are securities backed by pools of assets including mortgages, as well as $5.7 billion in subprime mortgages. Still, neither Mr. O’Neal nor Chief Financial Officer Jeffrey Edwards would give a breakdown of how much Merrill had cut its exposure by hedging or by asset sales. When both executives noted that Merrill had volunteered more information about its exposure than its Wall Street peers, analyst Mike Mayo of Deutsche Bank AG retorted, ‘but your peers didn’t take an $8 billion write-down.’” Merrill’s exposure to troubled mortgages was a mystery that lasted until — and after — the firm was bought by Bank of America and announced an opaque $15 billion loss in 2008.
Update: Due to popular demand, we added detail on Mayo’s calls, their effects and results. We also trimmed some comments below. Keep it civil.
