S&P Sees Ratings Pressure on US Banks Despite Bailout
Standard & Poor’s says there continues to be downward ratings pressure on major US banks, even though the risks of a “credit cliff” have receded in the wake of the government rescue plan.
S&P said it will likely not change banks’ ratings at this time as a result of the government’s actions.
“However, while we believe these actions will help restore confidence in financial institutions and help stabilize funding markets, the very real issue of deteriorating asset quality as the economy slows, continues to pose risks to the banking system in our view.”
We expect earnings to suffer from continued write-downs on market-disrupted securities and, more importantly going forward, from provisions for loan losses.
Thus, there continues to be downward ratings pressure on the major banks, even though the risks of a credit cliff have receded.
S& P said it is in the process of reassessing both industry risk and individual bank and bank holding company debt ratings in light of recent events. Specifically, there are eight issues that we will be addressing in this industry reassessment:
- How the business of banking may fundamentally change;
- Level of capitalization, asset quality, and estimated loss projections;
- Rating to fundamentals in irrational markets;
- Actual and potential government support or intervention;
- Operating company and holding company notching, including notching for hybrid securities and differences between senior and junior instruments;
- Appropriate leverage;
- Risk management issues such as risk appetite; and
- Funding/liquidity management and preparedness for dislocated markets.
S&P anticipates that the reassessment of the industry and rating actions, if any, will be completed within the next several weeks.
S&P said if banks are permitted to recognize losses over the next few years, rather than having to accelerate lifetime losses on loan portfolios into the current period, capital requirements, at least current regulatory ones, should be manageable. “However, fire-sale valuations could lead to widespread insolvencies not contemplated in ratings. We expect that the recent pronouncements by the Financial Accounting Standards Board and the SEC on mark-to-market valuations of illiquid securities should stabilize the markets even further, as will the confidence-boosting efforts of central banks and market regulators.”
For more, see U.S. Banks: Back to Fundamentals.
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