Bank woes nowhere near over - analyst

NEW YORK (CNNMoney.com) -- The percentage of loans that banks will need to write off will exceed levels seen during the Great Depression, according to a bank analyst's report Monday.

The report helped send bank stocks and the overall market lower as of mid-afternoon trading.

Mike Mayo of Calyon Securities gave the banking industry an "underweight" rating, citing "the ongoing consequences" of banks' increased risk-taking.

"The seven deadly sins of banking include greedy loan growth, gluttony of real estate, lust for high yields, sloth-like risk management, pride of low capital, envy of exotic fees, and anger of regulators," Mayo said in the report.

These "sins" created front-load earnings and pushed costs further down the line, Mayo said. Now those costs are appearing and many of the current problems being experienced are only midstream, he added.

Mayo initiated coverage of 11 major U.S. banks, each of which he gave an "Underperform" or "Sell" rating. Those in the underperform category included Bank of America (BAC, Fortune 500), Citigroup (C, Fortune 500), and JP Morgan Chase (JPM, Fortune 500). Banks labeled sell included Fifth Third Bancorp (FITB, Fortune 500), SunTrust, (STI, Fortune 500) and U.S. Bancorp. (USB, Fortune 500)

Mayo's prediction about loss ratios topping Depression era levels was not new. Mayo, who had worked at Deutsche Bank before joining Calyon Securities, made the same forecast in a report for Deutsche Bank on March 11. But Monday's report highlighted continued concerns about the financial sector.

Suffering U.S. banks face a three-fold problem: higher structural risk, cyclical pressures, and "catch-22 government actions," Mayo said.

Structural risk comes from issues with assets other than mortgages - which have already punished banks' balance sheets - that are likely to accelerate and create a "rolling recession," in which asset classes fall one after another, Mayo said.

The cyclical pressures of mortgages and an acceleration in cards, consumer credit, construction, commercial real estate and industrial will cause the loan losses-to-loans ratio to increase to 3.5% by the end of 2010 from the current 2%. The Great Depression's peak was 3.4%, according to the report.

Finally, government faces a difficult task in attempting to boost the financial sector, Mayo said.

"The government can go easy on the banks but, if so, (that) would leave many of the toxic assets on balance sheets," he said. But, he noted, overly tough actions will make banks scramble for capital.

Loans have been marked down to only 98 cents on the dollar on average, Mayo noted, which may indicate new government actions might not help as much as expected.

The report suggests banks' issues are widespread and multi-faceted, and Mayo stressed that many of the financial sector's problems are only midstream.

"The impact of excessive risk, while already seen, still has more to go," he said.