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Moody's Says Many U.S. Banks Will Remain Unprofitable in 2010

March 10, 2010 3:34 PM EST
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Moody's Investors Service reaffirmed its opinion that serious quality issues remain for U.S. banks in its latest report on the banking system for the fourth quarter of 2009.

Despite improvements in the final three months of 2009, the negative outlook by Moody's is being driven by the low quality of assets and the effects on capital for U.S. banks. According to the report, nonperformers and charge-offs remain at nearly historic levels.

"We believe rated U.S. banks have recognized approximately 45% of the loan charge-offs that will be realized from 2008 to 2011," said Moody's Vice President and Senior Credit Officer Craig Emrick. "Although loan loss allowances stand at unprecedented levels, the remaining provisioning required to finish cleaning up balance sheets will make many U.S. banks unprofitable in 2010."

According to the report from Moody's, the banking system showed minor declines in aggregate non-performing loans and charge-offs due to the improvement of large bank mortgage portfolios.

U.S. rated banks have charged off $240 billion in loans over the past two years, while Moody's estimates another $296 billion in charge-offs by the end of 2011. Only 42 percent of the charge-offs have been recognized for residential mortgages and 30 percent for commercial real estate.

Smaller banks however, were affected negatively in the quarter the weakening of commercial real estate assets.

Commercial real estate's annualized charge-offs for the quarter were 4.1 percent, compared to 2.5 percent for residential, while nonperformers in the commercial sector were 9.3 percent in the quarter, versus 6 percent for residential.

Moody's projects that rated U.S. banks will require substantial provisions to offset the remaining charge-offs that will occur over the next two years. Current the banks have $188 billion in allowances for loan losses.

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