Moody’s Investors Service said in its yearly report that both the US banking industry rating outlook and the industry’s broader fundamental credit outlook continue to be negative because of the sharp economic recession that is cutting deeply into US bank balance sheets. Moody’s rated US banks hold approximately 85% of the nation’s total banking assets.
Moody’s states that it expects US rated banks will incur a total of approximately $470 billion (pre-tax) of loan and security losses and write-downs in 2009 and 2010. The lending portion of this estimated loss is $415 billion, or 8% of the industry’s outstanding loans at the end of last year.
As a result of these substantial asset quality problems and the need to build reserves, many US banks will be unprofitable in 2009, placing considerable strain on their capital levels, the rating agency believes. Highlighting the key challenge to bank profitability, Moody’s said that, despite heightened provisioning over the past several quarters, banks’ coverage of bad loans continues to drop; the ratio of allowance for loan losses to non-performing loans stood at 70% at March 31, 2009 versus 100% in the first quarter of 2008.
According to Vice President - Senior Credit Officer Craig Emrick, an author of the annual study, Moody’s projected losses have already been a major factor in the downgrade of the financial strength ratings of 35 US banking groups, or about 50% of its rated universe, during the 12 months that have just ended.
Moody’s Bank Financial Strength Rating (BFSR) represents the agency’s opinion of a bank’s intrinsic safety and soundness and, as such, excludes certain external credit support elements.
“Over the same period,” he says, “the median US BFSR has fallen by an entire notch, to C+ from B-, and nine banks have been downgraded to a BFSR that, in most cases, signifies a non-investment-grade stand-alone rating.” The highest stand-alone financial strength rating for a US bank has also fallen by a notch to B+, down from an A-.
“As it happened, the current macroeconomic scenario under which we are now positioning our BFSR ratings has turned out to be similar to, although more severe than, the worst-case forecast we had posited in last year’s industry outlook,” the analyst says.
“The rating downgrade patterns predicted by our May 2008 estimates were generally congruent with what actually took place during the ensuing year,” he adds.
“However, our assumption of increased systemic support has significantly mitigated the volatility in US bank deposit ratings in comparison to BFSRs,” Mr. Emrick points out.
Stress Scenario Shows More Banks at Risk
In response to the rapidly changing global economic landscape, Moody’s has outlined the ratings impact of more severe macroeconomic conditions.If the global economic situation worsens in 2010, for instance, the rating agency believes there would be another heavy toll on US BFSRs — both in the number of banks affected and in the intensity of the downgrades.
“Under more adverse conditions, numerous US banks could become insolvent by the end of 2010,” said Mr. Emrick. “More specifically, based on our modeling of such an adverse scenario,” the analyst states, “we calculate that US rated banks could incur a total of approximately $640 billion (pre-tax) of loan and security losses and write-downs in 2009/2010; without additional capital, this means that more than a third would fall below investment grade on a standalone basis, as measured by our BFSRs.”
“Additionally,” he says, “if the US economy worsens beyond expectations US banks would need to raise significant amounts of additional equity capital. For instance, under this adverse scenario we estimate that recapitalizing all rated banks back to a B- financial strength level would require a $112 billion investment.”
The report is titled “Banking System Outlook: United States of America 2009″.
–www.theasianbanker.com (June 3 2009)–
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Asian Banker
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