Bleak Outlook for US Banks Through 2009
Although government financial support has buoyed U.S. banks, the industry will likely experience overall credit quality deterioration through at least 2009, according to Standard & Poor’s U.S. Banking Industry Outlook 2009.
As the recession deepens, Standard & Poor’s expects a further increase in loan credit costs and continued high loan-loss provisioning to eat into bank earnings.
“We expect government programs such as capital injections and debt guarantees to largely support the banking system as a whole, but they will not serve as a panacea for all U.S. banks, particularly midsize and smaller institutions that the government does not recognize as systemically important,” said Standard & Poor’s credit analyst Barbara Duberstein.
As in other credit cycle downturns, the number of bank failures will likely rise in 2009 from an already high number in 2008, in our view.
Standard & Poor’s expects nonperforming loans and loan net charge-offs to continue to rise into 2009 and 2010. In addition, asset-quality weakness will likely spread to a wider range of loan types such as commercial real estate, credit cards, and certain pockets of commercial lending, such as loans to the auto and retailing industries.
CreditSights thinks that In general bank/broker spreads should benefit from systemic support measures, while fundamentals remain extremely challenging . “Most of our bank/broker universe has required capital to withstand higher future provisioning in hot stove areas such as residential and commercial real estate and credit cards among the notables. This capital cushion absorbs the provisioning pain and allows for restoration of more normal banking activities over time.”
In its Banks 2009 Outlook, CreditSights recommends:
- For stocks: Maintain Overweight for JPMorgan (NYSE:JPM), Bank of America (NYSA:BAC) as they represent the national brand champion configurations which add stability to operating profiles
- Increase to Overweight from Marketweight Citigroup (NYSE: C) based on stock price that has been oversold compared to its breakup value
- Maintain Marketweight on Goldman Sachs (NYSE:GS), and Morgan Stanley (NYSE:MS) due to revenues challenges and strategic pressures to reinvent as banks
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