Wednesday, June 17, 2009

Banks Under The Gun...Once Again.

We spoke about how precarious the situation is in the financial sector. How the back up in long term interest rates have put a dent in the banks refinance mortgage business. Capital One didn't do the sector any more favors when they announced that charge offs were up 9.4% in May. The S&P 500 Financial Index also was also sitting just below its 200 DMA. The markets have rallied of late for many reasons such as unwinding of safe trades into equity, as well as lack of negative news flow.

Well today the negative news flow is back in business as S&P has downgraded 22 US banks.

Here is the Press Release from S&P:

Standard & Poor's Ratings Services said today that it lowered its ratings and revised its outlooks on 22 rated U.S. banks. The actions reflect our belief that operating conditions for the industry will become less favorable than they were in the past, characterized by greater volatility in financial markets during credit cycles, and tighter regulatory supervision. The changes also reflect our ongoing broad-ranging reassessment of industry risk for U.S. financial institutions (see "How The Credit-Market Crisis Is Changing The World Of Banking," published Nov. 25, 2008, on RatingsDirect).

Our overall assessment of the U.S. banking industry incorporates the following key points: The industry is now in a transition and will likely undergo material structural changes; the loss content of loan portfolios should increase, but recent capital rebuilding should help banks defray these losses; stress tests point to more pain in the future; we don't view regional banks as being highly systemically important; and potential losses could increase beyond our current expectations. "We believe the banking industry is undergoing a structural transformation that may include radical changes with permanent repercussions," said Standard & Poor's credit analyst Rodrigo Quintanilla. "Financial
institutions are now shedding balance-sheet risk and altering funding profiles and strategies for the marketplace's new reality. Such a transition period justifies lower ratings as industry players implement changes." Possible changes include increased regulatory oversight and lower profitability.

In addition, we reassessed the relative creditworthiness of many institutions based on their abilities to deal with the increased risks during this transition period. "We believe some firms may be better able to weather the risks ahead than others," Mr. Quintanilla added. "In the long term, we could foresee ourselves raising ratings if lower earnings and reduced risk are accompanied by stronger risk-adjusted capital and effective governance." As a result of the downgrades this week, as well as those since mid-2007, the counter party ratings on U.S. banks (at the operating subsidiary level) have fallen by an average of two notches, to 'BBB+' today from 'A' before the crisis began in June 2007. However, said Mr. Quintanilla, "the high number of firms with negative outlooks suggests that the ratings could still decline if the credit cycle is longer and/or deeper."

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