S&P Expects Further Deterioration of US Finance Companies
It’s not a pretty picture. Of the 31 U.S. finance companies rated by Standard & Poor’s Ratings Services, four have applied to become bank holding companies and 16 have been downgraded over the past two months.
Deteriorating asset quality and increased funding costs weakened earnings, resulting in negative rating actions on several consumer finance companies during the third quarter. Given the economy’s current trajectory, we expect these trends to continue.
S&P warns the sector is likely to continue to struggle, but said that to the extent finance companies can take advantage of government actions aimed at stabilizing them, the outlook might improve.
American Express Co. (NYSE: AXP), CIT Group Inc. (NYSE: CIT) , CapitalSource Inc. (NYSE:CSE), and GMAC LLC have all taken steps to become bank holding companies to gain access to cheaper funding and government debt guarantees.
Losses are expected to accelerate for commercial lenders, S & P said, especially in commercial real estate. In addition,
- Asset quality continues to weigh down finance companies involved in residential mortgage, credit cards and auto loans.
- Some business development companies may struggle to meet minimum net-worth covenants after taking large write-downs on their investment portfolios.
- Asset-backed securities and commercial paper markets remain virtually frozen, leaving businesses to rely on banks.
For details, see “U.S. Finance Companies Seek Shelter from the Storm in the Third Quarter.”
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