Goldman Says We're Entering Final Third of U.S. Bank Losses; Says Stress Test Was Enough (XLF, BAC, JPM, COF)

Goldman Sachs issued a research report on U.S. banks today, saying we are entering the final third of loss recognition with $1.6 trillion of losses realized to date.

Goldman still believes there will be $2.1-$2.6 trillion of total loss from US credit, but updated the expected composition of the losses with more for prime mortgage and commercial real estate and less for consumer and C&I.

The firm said the cause of the losses is mainly bad lending, particularly in real estate. They said 98% of losses can be traced to bad loans in general, and 70% of losses can be traced back to bad real estate loans. They note that almost every bank that has failed has either been overweight Option ARMs or construction loans.

On questions about if the government's stress test was enough, Goldman says "yes." The firm notes that although unemployment is at 10.2%, versus a 10.3% stress test peak, 2009 loan losses, trading results, and pre-provision earnings have all tracked better than the stress test forecast. Also banks have raised $10 billion more capital than the stress test required.

The firm continues to favor consumer credit. They remain positive on big banks and credit card stocks with JP Morgan Chase (NYSE: JPM), Bank of America (NYSE: BAC) and Capital One (NYSE: COF) all Conviction Buy List-rated.

Related ETFs:
Financial Select Sector SPDR (NYSE: XLF)
SPDR KBW Bank (NYSE: KBE)

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