A surge in borrower defaults and unemployment pressures will make 2009 an even uglier year for banks than last year, analyst Meredith Whitney said.
She predicted "breakups and M&As on a grand scale" as the industry seeks to remake itself in the face of all its capital pressures.
"I don't think this year is going to look any better than last year," Whitney said in an interview Tuesday on CNBC. "In fact it will look worse because there's so much credit coming out of the system."
Whitney, a former analyst at Oppenheimer who recently opened her own firm, is renowned for calling out the problems with banks' toxic assets before the issue became widespread.
As some have been predicting the worst may be over for the banking sector, Whitney countered that many of the statements about some of the big banks showing profits ignore the burden that additional writedowns will pose through the year. In particular, she said Citigroup's statement that it had turned a profit the first two months of 2009 might came back to haunt it once a fuller picture was presented.
Consumers also will face pressure as unemployment grows and banks and credit card companies start calling in credit lines to avoid getting stuck with even more bad debt.
"The probability of more people going into default is higher, so the banks are going to have a tough time," she said.
As a solution to some of the banking system's woes, Whitney said the government should focus less on ever-changing rescue plans and instead start helping smaller institutions ramp up their community lending to local businesses and homeowners.
"You can re-energize the local lending scene and then supercharge those banks," she said. "You supercharge those so they're able to gain critical mass and start getting loans on a super-regional basis to businesses, to homeowners that qualify. At least that mitigates some of the capital that's surely going to come out of the market."
The financial sector has been under pressure since the onset of the credit crisis last fall. But recently major banks like Citigroup , JPMorgan Chase and Bank of America, have said early results are showing signs of hope.
Whitney predicted that some of the largest institutions will be remade this year in a way not seen before. Those mergers and acquisitions will see companies come together to create unique syynergies--she used a blending of Citi and American Express as a hypothetical case where one business' strength could compensate for another's weakness.
"You're going to have some growth vehicles that come out of it but they're not going to look anything like today's version of these gobbledygook banks," she said.
In addition to the natural activity that will take place, Whitney said banks also will need help from Washginton. She urged policy makers above all to be consistent.
"Any game that you want to plan as a corporation, the rules are changing all the time," she said. "You can't function as a business operator if the rules are changing."
Displaying leadership and managing expectations will be the key.
"They need to show leadership by saying, 'OK, what's the world going to look like in five years?' and look backwards from that," Whitney said. "In five years you know that the big banks are going to have a lot less control and power than they have now. We have to disaggregate, dislodge that market share dominated by five main players."
"Let's invigorate and supercharge some of the smaller players to get them to a medium-enough size so they can start making loans and they can start moving the needle."
And she called on government leaders to harness the American spirit to rebuild the economy, similar to the way so many people come together to wear the color of the Irish on St. Patrick's Day.
"There's a spirit that can't be dislodge by the economic turmoil," she said. "Now is a great opportunity to capture that spirit as opposed to set expectations too high which is what (Treasury Secretary Timothy) Geithner did with the original plan and then just disappoint. People will give you the benefit of the doubt until you keep disappointing them."
- Part Two: More from Whitney on Financials
- Part Three: Washington Understaffed