Moody's Reiterates Negative Outlook on U.S. Banks

September 10, 2009 9:54 AM EDT

Today, Moody's reiterated their negative outlook on U.S. banks, saying asset-quality troubles will force US banks to post substantial additional provisions in 2009 and 2010, making many US banks unprofitable for extended periods and putting stress on capital levels.

Moody's Vice President an Senior Credit Officer Craig Emrick said, "We do not believe asset quality deterioration for the US banking industry has reached its peak, and we therefore anticipate multiple quarters of losses for a large number of rated banks."

As first discussed in June 2009, the rating agency expects that US rated banks will incur approximately $470 billion of loan and security losses and write-downs during 2009 and 2010. The lending portion of this estimated loss is $415 billion -- or 7.5% of rated US banks' outstanding loans at the end of last year.

Higlights from the Moody's report:

• Through the first half of 2009, US rated banks recorded $70 billion of net charge-offs, or approximately 1.3% of loans outstanding at December 31, 2008. "We expect that US banks will incur $345 billion of charge-offs during the last half of 2009 and 2010, equal to 6.2% of year-end 2008 loan balances, to reach our full estimate," says Mr. Emrick. This compares with the total June 30, 2009 allowance for loan losses of 3.3%.
  
• Aggregate non-performers rose to a sizable 4.3% of all loans at June 30, 2009, and 2Q09's total annualized net charge-offs came to 3% of total loans.
  
• Provisioning needs resulted in 44% of Moody's US rated banks posting a net loss in 2Q09. However, those banks reporting losses only represented 19% of rated bank loans, illustrating that larger banks were generally more profitable in the second quarter -- mainly due to the capital market activities at these institutions.
  
• Asset quality erosion was experienced across all asset classes in the second quarter. "However, commercial real estate has caught up with -- and has surpassed by some measures -- residential real estate deterioration," said Moody's Assistant Vice President Joseph Pucella. For example, commercial real estate non-performers at rated US banks now exceed residential real estate non-performers on a percentage basis (7.2% versus 5% as of June 30, 2009, on an aggregate basis). Charge-offs in these two asset classes were generally equal at 2.5% for 2Q09 (annualized).
  
• Within the commercial real estate sector, construction loans -- especially residential construction loans -- have shown significant deterioration. Commercial and residential construction non-performers for rated US banks were 9.2% and 25.8%, respectively, at June 30, 2009, while aggregate annualized net charge-offs were 5.4% and 8.9% for the quarter.
  
• Positive trends in the quarter included a slight decline in early-stage delinquencies, as well as stabilization of the ratio of allowance for loan losses to non-performing loans from the first quarter of 2009 -- although at the low level of 78%. Also, equity market access for US banks improved in 2Q09, thereby permitting significant common equity raises. Between 1Q09 and 2Q09, the aggregate tangible common equity to risk-weighted assets ratio for US rated banks increased to 6.0% from 4.8%.

Banks stocks: Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC), JPMorgan (NYSE: JPM), Citigroup (NYSE: C), BB&T (NYSE: BBT), PNC (NYSE: PNC), US Bancorp (NYSE: USB).

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