Banks' outlook improves but still risky: agencies
U.S. banks are slowly working their way through a mountain of non-performing loans from the credit crisis, but dangers still abound, two credit rating agencies said on Wednesday.
Among the risks still looming are the impact of the European sovereign debt crisis and the chance the global economy may deteriorate.
Moody's Investors Service said in a first-quarter report it estimates the U.S. banks it rates have made about 60 percent of the total $744 billion of aggregate loan charge-offs they will undertake from 2008 to 2011.
The remaining losses, though sizable, are beginning to look manageable, Moody's said.
It warned, however, that a worsening of the global economy in 2010, the probability of which Moody's places at 10 percent to 20 percent, would significantly strain U.S. bank fundamental credit quality.
That possibility drives our continuing negative outlook for the U.S. banking sector, Moody's said.
By contrast, Fitch Ratings was more optimistic in its broad assessment of the U.S. banking sector.
Fitch revised up its overall U.S. banking sector outlook to stable from negative, as bank earnings and capital positions improve and non-performing assets stabilize.
The outlook had been negative since late 2007, when the global financial crisis was starting. In the aftermath of the crisis, which reached its nadir more than a year ago, U.S. bank earnings have been slowly recovering, Fitch analysts said in a first-quarter report.
With U.S. banks reporting results for the most recent quarter, it is becoming more apparent that financial stability is beginning to emerge across the industry, Fitch wrote.
Fitch expects bank core earnings to continue to show slow but steady improvement over the next few quarters.
Further supporting Fitch's revised outlook is the stabilization of non-performing assets and the vastly improved capital and liquidity positions of the larger U.S. banks in general, it said.
But U.S. bank earnings and revenue are still comparatively weak relative to pre-crisis levels and will likely remain pressured over the next few quarters, Fitch said.
Moody's also warned of problems on banks' balance sheets.
Although charge-offs and non-performing loans are past the peak, the return to 'normal' levels of asset quality will be slow and uneven over the next 12 to 18 months, said Craig Emrick, a senior credit officer with Moody's covering U.S. banks.
Despite two straight quarters of improvement in U.S. bank charge-offs, they remain near historic highs dating back to the Great Depression, while the commercial real estate market could yet decline further, pushing charge-offs up again, Moody's said.
Fitch said its overall stable outlook does not incorporate exogenous shocks, but the agency would factor in any such events should they occur.
Fitch is mindful of risks associated with the ongoing sovereign debt crisis in Europe, as well as the budgetary pressures across many U.S. states and municipalities, which could pose new risks for banks in general, it said.
For those banks that still have a negative outlook, Fitch said it anticipates resolving these individually over the next few months. That could result in outlooks going to stable or in more limited instances, in a one notch downgrade, with the outlook then going to stable, Fitch said.
(Reporting by John Parry; Editing by Leslie Adler)
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