With regional banks such as Capital One Financial (COF) supposedly in play, we are pleased to offer a complimentary download of Standard & Poor’s latest Industry Report Card on the sector.
Selected excerpts:
Much like first-quarter 2010, the large U.S. regional banks in Standard & Poor’s Ratings Services’ rated universe reported improving, albeit still-weak results in the second quarter. Generally, net operating losses declined further and credit deterioration slowed or improved in most cases. Most of the large regional banks reported net losses, while the large trust banks remained firmly profitable. Unlike the large complex U.S. banks, the large regional banks typically have higher commercial real estate (CRE) exposures, which will likely continue to hurt loan performance and delay their recovery relative to peers.
In summary, we expect net losses to moderate further in the near term, which could ease pressure on our ratings of large regional banks.
Despite some stabilization, we expect credit costs to remain elevated in the second half of 2010. However, many banks are forecasting lower loan-loss provisioning needs, reflecting the generally reduced inflow of new problem credits and potentially lower levels of loan charge-offs. Furthermore, capital and liquidity measures have continued to improve, supported by recent common equity issuances, good deposit growth, and further balance-sheet contraction.
Industry Report Card: U.S. Large Regional Banks’ Second-Quarter Results Showed Further Improvement has been made available free of charge to Research Recap users for 30 days by special arrangement with Standard & Poor’s, an Alacra content partner. After 30 days, the report will revert to its regular Alacra Store price of $750.00.
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Technorati Tags: (BBT), (BK), (COF), (STI), (STT), Bank of New York Mellon, BB&T-Corporation, Capital One Financial, Comerica, complimentary research, Fifth-Third-Bancorp, First Horizon, Huntington-Bancshares-Inc., KeyCorp, M&T Bank Corp, Marshall-&-Ilsley-Corporation, Northern Trust, Popular Inc, regional-banks, Regions-Financial-Corporation, State-Street, SunTrust, Synovus-Financial-Corporation, UnionBanCal-Corporation, Zions-Bancorporation
Visa (V) and Mastercard (MA) dodged a major bullet when the new financial reform bill signed into law last week did not regulate debit card network fees, the fees the two companies collect for each debit card swipe that is processed through their payment networks, says Moody’s. However, the new law will likely reduce debit interchange fees, the fees that merchants pay to banks to process debit card payments from consumers.
The net effect of the new regulation has negative credit implications for Visa and MasterCard because debit card usage could fall at the same time that banks seek pricing concessions from the card companies to compensate for lower interchange fees.
Although Visa and MasterCard set the debit interchange rates that are paid to card-issuing banks, neither company collects any portion of these fees. Any reduction in debit interchange fees from the new law would hurt the banks but not directly impact Visa and MasterCard. However, reduced interchange fee revenues for banks could prompt the banks to pass the rate cut onto consumers (i.e., the debit card holders) in the form of higher fees and/or steer consumers to alternative payment networks (e.g., their own closed-loop systems, similar to American Express or Discover). These actions could make Visa and MasterCard programs less attractive, thus reducing debit transaction volumes for the card processors.
In addition, banks could seek to renegotiate their contracts with Visa and MasterCard to share the economic pain associated with lower interchange fees, which would potentially threaten a major revenue stream for the card companies. The current credit ratings for Visa and MasterCard capture these looming risks.
Technorati Tags: (V), credit card ABS, credit-cards, M&A, MasterCard, Visa
The US economy is recovering much more slowly than expected after a severe recession and still faces downside risks, says Oxford Economics,
Excerpts from USA: Country Economic Forecast: 19 Jul 2010 (Premium)
The recent spate of relatively weak indicators, including very low consumer confidence, subdued private sector job growth and the
continuing fragility of the housing sector, has raised concerns about a double-dip recession.
However, while such an outcome cannot be dismissed it is not being signaled by indicators such as new orders, which remain strong, or readings on the ISM indexes that are consistent with moderate growth. And a healthy corporate sector, loose monetary policy and low long-term interest rates are also supportive factors.
Overall, in the light of recent data and signs of moderating growth overseas, we have pared back our growth forecasts to 3.1% for 2010 and 3.3% for 2011, down from 3.4% and 3.8% a month ago.
An important risk to the forecast remains the outcome in Europe, both in terms of the extent of the slowdown there and risks to the
banking sector.
There are significant risks to this forecast. The European situation is one. If it should evolve into a full-blown banking and financial crisis, the resulting credit freeze is likely to engulf the entire world, including the US.
On the domestic side, volatility in the financial sector and weak employment gains could weigh more heavily than we expect on consumers, causing an outright retrenchment rather than merely conservative spending growth.
Another wild card is tax policy – if Congress fails to act before the end of 2010, tax rates in 2011 will revert to levels that prevailed before the Bush tax cuts.
Technorati Tags: economic forecasts, US-economy
Despite some improvement in ratings, the credit outlook remains grim for many media and entertainment companies with unmanageable debt burdens, especially those in sectors that have not yet seen a turnaround in revenue and EBITDA, according to Standard & Poor’s.
In an Industry Report Card, S&P says further traction in the industry’s recovery is critically dependent on the prospects for a sustained economic recovery, and on consumer spending in particular. “Many of the subsectors in the U.S. media and entertainment industry rely heavily on advertising. For these subsectors, our credit outlook incorporates the following trends and expectations:
- Online media is rebounding strongly from the recession and will continue to absorb share of total ad spending, with search-related advertising and, to a lesser extent, display fueling growth.
- Cable and broadcast networks‘ robust 2010 upfront market (the period in which advertisers commit to ad time for the coming fall-to-spring TV season) is likely to be followed by healthy scatter market advertising (advertising sold quarter by quarter after the upfront).
- Local TV trends, supported by recovering auto advertising and political campaign spending, will likely outpace other local media.
- Outdoor advertising may not post positive numbers until the second or third quarters, but local radio should be able to continue its recovery (compared with severe 2009 declines) over the near term. We believe radio advertising faces long-term structural impediments to sustained growth.
- A deceleration of revenue declines for newspapers and magazines, with a return to sustainable growth likely elusive over the near term.
A potential positive factor in the 2010 outlook is the early 2010 U.S. Supreme Court ruling that loosened restrictions on corporate and nonprofit campaign advertising spending.
For the subsectors that do not rely on advertising, technology and consumer usage shifts, along with the audience reception of content, have had a greater influence than economic trends. The collective stresses on some of these non-ad-reliant subsectors are still apparent:
- The recorded music industry continues to report double-digit CD sales declines, and slowing growth in digital sales.
- Movie producers continue to indicate lower DVD sales–especially for catalog titles.
- Motion picture box-office receipts are up year to date, after a strong first-quarter increase. We still see the possibility of a full-year decline in 2010.
For details see: Industry Report Card: U.S. Media&Entertainment Sector Recovery Faces A Test Of Staying Power (Premium)
Technorati Tags: ad spending, broadcasting, cable, magazines, Media, media and entertainment, mobile advertising, newspapers, online-advertising
Moody’s is cautiously optimistic about the US housing market in a new Special Comment, and retains its stable outlook for the US homebuilding sector.
Excerpts from Weak May Home Sales in the Wake of Expired Tax Credits: Harbinger of a Double Dip or Just a Speed Bump in the Road to Recovery? (Premium)
Although we do not believe the homebuilding sector will start to show sustainable profitability until 2011, we do anticipate conditions will gradually improve. While a double dip could be in the cards, a more likely scenario is that last month’s steep decline in new-home sales and a continued softness in June are speed bumps in the road to a slow and unsteady recovery.
We continue to believe that the risks, while still considerable, are no longer heavily skewed to the downside, which was a major consideration in our decision to change our industry sector outlook to stable from negative in December 2009; it is also a major factor in our maintaining our current stable outlook.
The stable outlook could return to negative, however, if there is either an unusually steep reduction in government support for the industry or an economic double dip causing sharply reduced buyer demand that lasts beyond the brief period that we currently expect.
On the other hand, although it may appear somewhat far-fetched given the current gloom over the industry’s results in May, the stable sector outlook could climb to positive once the majority of homebuilders appear to be headed toward sustainable profitability. Assuming, as we do, that the current malaise is temporary, this could conceivably happen sometime next year.
Technorati Tags: homebuilders, housing
European pharmaceutical companies are still increasing sales in 2010 in spite of pressure from governments to cut prices of patented drugs, says Standard & Poor’s Ratings Services a new Industry Report Card European Pharmaceutical Sales Are Rising, Seemingly Immune To Pressures On Public Health Budgets (Premium)
Selected excerpts:
Rated pharmaceutical firms’ sales rose by an average of about 6% in 2009 and about 8% in the first quarter of 2010, on a non-weighted basis.
We believe this was on the back of new products, such as Novartis AG’s (NOVN) anti-hypertension drug Exforge, as well higher demand for pandemic vaccines after governments placed orders to be prepared for a potential outbreak of the H1N1 pandemic.
Furthermore, prices for branded pharmaceuticals increased in the U.S. one year before the U.S. government passed its health-care reform in March this year, reportedly as the industry established higher price bases ahead of reform.
Nevertheless, pharmaceutical companies could face increasing pressures on their profit margins in the future as European governments tighten their health-care budgets and if generic drugs pose an increasingly aggressive threat to the big pharmaceutical firms’ patented drugs, the report states.
We believe that high public debt will encourage many European countries to adopt austerity packages that are likely to result in cuts in health spending in the future. Given rising health-care needs and increasing spending restrictions, we expect that the cost burden will be shared by more parties in the future.
However, in 2009 and the early part of 2010, good cash flow generation throughout the industry has paved the way for a tentative return to share buybacks by European pharmaceutical firms.
We retain our neutral to slightly positive outlook for the credit quality of rated pharmaceutical companies in 2010, which is why the outlook is stable on the majority of rated companies.
According to the pharmaceutical consulting service IMS Health, sales in all the emerging markets are likely to far surpass those of the U.S. over the next decade. We believe this will particularly benefit European pharmaceutical companies because they have already established footholds in the emerging markets in recent years.
Technorati Tags: (AZN), (BAYN), (MRK), (NOVN), (PFE), (RO), (SAN), AstraZeneca plc, Bayer AG, drug pipeline, drug-approvals, European pharma, Inc., Merck, Novartis AG, Pfizer Inc., pharma, Pharmaceuticals, Roche Holding Ltd., Sanofi-Aventis S.A.
In new paper, NERA Economic consulting examine the current trends in filings, settlements, recent decisions, and the changing nature of allegations in credit crisis lawsuits.
Excerpts from Credit Crisis Litigation Revisited: Litigating the Alphabet of Structured Products
The lawsuits, just like the credit crisis, have evolved towards more complex financial products and the trends in allegations, defendants, and plaintiffs have shifted accordingly.
As of April 2010, there are conflicting signals regarding the future of the litigation. On one hand, credit crisis filings have declined and almost half of the decisions to date have been dismissals. However, the types of allegations, products, and defendants continue to shift, and the cases against some defendants, most notably the rating agencies, have survived several motions to dismiss and will proceed. In addition, the regulatory investigations, such as the recent Securities and Exchange Commission (SEC) lawsuit against Goldman Sachs, add to the uncertainty surrounding the direction and focus of the litigation.
(Click image to enlarge)
The largest component of the writedowns and losses has been loan charge-offs and increased loss provisions, accounting for 36%, or $641.9 billion. Firms that engage in loan origination, securitization, or maintenance typically provide for credit losses or loan losses as part of their normal operations. As delinquencies and foreclosures increased both in the US and internationally, firms have had to increase their charge-offs and loan loss provisions—the latter related to future charge-offs of impaired loans. The loans in question include mortgages, credit cards, student loans, and auto loans, among others.
As the crisis has encompassed market participants beyond the primary mortgage markets and losses have stemmed from financial products beyond just mortgage loans, the litigation has also followed suit. In 2009 and the first quarter of 2010, the credit crisis lawsuits have increasingly focused on asset-backed securities and complex financial products such as CDOs and derivatives. This move has been in tandem with regulatory investigations focusing on the role of structured products in the crisis. In fact, in 2010, at least six investment banks are being investigated by the SEC over the securitization of CDOs.5 During the same time period, litigation against originators involving losses of mortgage loans has declined.
Technorati Tags: CDO, collateralized debt obligations, credit-crisis, derivatives, litigation, subprime
A new study from Standard & Poor’s finds that credit ratings have generally been accurate, with the notable exceptions of recent vintage US residential mortgage-backed securities and collateralized debt obligations backed by residential securities. “The performance of ratings for U.S. RMBS and SF-CDOs issued from 2005 through 2007 has been disappointing and below our expectations.”
Selected excerpts from A Global Cross-Asset Report Card Of Ratings Performance In Times Of Stress
In the wake of the latest financial crisis, there has been much discussion about the performance of credit ratings. We have conducted a comprehensive review of credit ratings—spanning the spectrum of corporate, government, and structured finance debt. This review has demonstrated that ratings issued in the U.S., Europe, Japan, and Australia for nearly all asset classes generally performed as expected, with the exception of ratings on U.S. residential mortgage-backed securities (RMBS) and on collateralized debt obligations backed by structured finance collateral, usually residential securities (SF-CDOs). That is, rated credits withstood the recent financial crisis with results in line with expectations for the economic environment. In contrast, the performance of ratings for U.S. RMBS and SF-CDOs issued from 2005 through 2007 has been disappointing and below our expectations.
Standard & Poor’s performance review reaffirms two key attributes of ratings:
- First, even during periods of economic stress, ratings have been and continue to be reasonable predictors of the relative likelihoods of default of different credits. In short, credits with higher ratings generally experience lower default rates. This trend held up across asset classes for the three stressful periods studied (1991, 2001, and 2008/2009), with the exception of RMBS and SF-CDOs during the recent crisis.
- Second, sectors other than RMBS and SF-CDOs did not experience disproportionate downgrades relative to the degree of economic stress. Downgrades typically increase in all sectors during periods of stress, but apart from RMBS and SF-CDOs issued between 2005 and 2007, the pace was not exceptional.
The recent debate has largely focused on the performance of ratings for U.S. RMBS issued from 2005 through 2007.
Although Standard & Poor’s criteria for rating such securities contemplated substantial declines in home prices, the actual deterioration of the U.S. residential real estate market was more significant than we and others had anticipated and was more severe than we had associated with the contemporaneous macroeconomic stress.
In addition, during the financial crisis, defaults and losses on residential mortgage loans displayed unanticipated sensitivity to declining home prices. Together, U.S. RMBS and all CDOs constitute less than 10% of the total debt that Standard & Poor’s rates. On balance, the recent performance of ratings, both in the U.S. and globally, for other types of structured finance securities and for government and corporate debt has been in line with performance during the previous two recessions.
Although we believe that the recent underperformance for ratings of U.S. RMBS and SF-CDOs is not reflective of a larger trend, Standard & Poor’s has made many changes based on lessons learned from the recent financial crisis. For example, we have made significant enhancements to our criteria for rating U.S. RMBS, CMBS, and CDOs. Overall, the updated criteria should make it more difficult for securities in the sectors that have displayed poor credit performance to receive high ratings.
In addition, Standard & Poor’s has incorporated credit stability as an important factor in its ratings criteria. When assigning and monitoring ratings, we consider whether we believe an issuer or security has a high likelihood of experiencing unusually large adverse changes in credit quality under conditions of moderate stress. In such cases, we would assign the issuer or security a lower rating than we would have otherwise.
Technorati Tags: collateralized debt obligations, rating-agencies, residential mortgage-backed securities, structured-finance
While U.S. bank asset quality issues are past the peak, charge-offs and non-performing loans remain near historic highs with commercial real estate assets held by regional banks the area of most concern, according to Moody’s latest assessment.
“We believe rated U.S. banks have recognized approximately 60% of the aggregate loan charge-offs that they will realize from 2008 to 2011,” said Moody’s Senior Vice President Craig Emrick. “Although remaining losses are sizable, they are beginning to look manageable in relation to bank’s loan loss allowances and tangible common equity.” However, a worsening of the global economy in 2010, the probability of which Moody’s places at 10% to 20%, would significantly strain U.S. bank fundamental credit quality.
In aggregate, the banks have recognized 60% of Moody’s estimated total charge-offs and 65% of estimated residential mortgage losses, but only 45% of estimated commercial real estate losses.
- Aggregate annualized net charge-offs came to 3.3% of loans in Q110 (versus 3.6% of loans for Q409 annualized). Despite two consecutive quarters of improvement in charge-offs, they remain near historic highs dating back to the Great Depression.
- The decline in aggregate charge-offs was driven by commercial real estate (CRE) improvement which we believe is likely to reverse in coming quarters. A similar commercial real estate decline was experienced in the first quarter of 2009 before charge-offs accelerated through the rest of the year.
- Non-performing loans remained at 5.0% of loans at March 31, 2010.
- U.S. rated banks have already charged off or written-down $436 billion of loans in 2008, 2009 and Q110, leaving $307 billion to reach our full estimate of $744 billion of loan charge-offs in 2008 through 2011.
- The US banks’ allowances for loan losses stood at $221 billion as of March 31, 2010, which is equal to 4.1% of loans. Although this can be used to offset a sizable portion of remaining charge-offs, banks will still require substantial provisions in 2010.
For the Big 4 Banks (Bank of America, Citigroup, JP Morgan Chase, and Wells Fargo), Moody’s estimates that the bulk of the remaining losses will come from residential mortgages and credit cards. On the other hand, for the other 10 banks that participated in the Supervisory Capital Assessment Program (PNC, US Bank, Bank of New York Mellon, SunTrust, BB&T, Capital One, State Street, Fifth Third, KeyCorp, and Regions), and other rated U.S. Banks, Moody’s expects a sizable amount of the remaining losses to come from CRE as these banks have more exposure.
For details, see U.S. Rated Bank Asset Quality Over the Peak, Lookout for a Bumpy Downhill Ride.
Technorati Tags: (bac), (BBT), (c), (JPM), (PNC), (WFC), Bank of New York Mellon, Bank-of-America, Capital One, Citigroup, commercial-real-estate, Fifth Third, JP Morgan Chase, KeyCorp, regional-banks, Regions, residential real estate, State-Street, SunTrust, U.S. banks, US Bank, Wells Fargo, writedowns
Most of the smaller U.S. regional banks and thrifts rated by Standard & Poor’s showed signs of recovery in first-quarter 2010, but commercial real estate remains a worry for some.
In a new Industry Report card S &P said the divergence between the better and badly performing companies continued to widen, though, as several continued to struggle, with some posting losses. The sector as a whole reported its highest average net income in more than a year and a solid quarterly improvement in profits. In our view, earnings improvement was directly related to a 36% drop in loan-loss provisions since fourth-quarter 2009, as loan charge-offs were generally lower. Capital at most of these banks strengthened, and some successfully accessed the financial markets through equity issuances.
Only four of the 23 of our rated smaller regional banks reported losses; these were Associated, Webster, Whitney, and Wilmington Trust. For most banks, net interest margins increased marginally, pushing up core earnings. This was primarily because of favorable deposit pricing. Noninterest revenues, on the other hand, were generally flat to slightly down, as higher deposits and lower loan demand kept fee income down. Most of the loan portfolios continued to shrink, from a combination of this anemic demand and tighter underwriting standards. Deposits remained stable or increased gradually at most banks, and liquidity remained strong, with continuing growth in core deposits and better access to other funding options as market conditions improved on last year’s.
For the rest of 2010, we expect that credit quality could be volatile for some among the smaller U.S. regional banks we rate. This is especially true for the CRE lenders, who often have significant single-borrower exposures.
Other loan categories that remain pressured include poorly underwritten residential mortgages and home-equity loans, residential mortgages in certain badly affected regions, and commercial loans. By region, the worst credit profiles remain among banks with large exposures to states with depressed real estate prices in recent years, particularly Arizona, California, Florida, Georgia, and Nevada. We believe that markets could soften in other regions before year-end.
For details see: Lower Provisions, Healthier Capital Supported U.S. Regional Banks’ First-Quarter Performance
Technorati Tags: (CBSH), Associated Banc Corp., Commerce Bancshares, commercial-real-estate, regional-banks, Webster Financial Corp, Whitney Holding Corp, Wilmington Trust
