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02 Jun 2009
New York, June 02, 2009 -- 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
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
"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".
* * *
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Financial Institutions Group
Moody's Investors Service
Moody's: negative outlook for US bank ratings
Craig A. Emrick
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
No Related Data.
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