US Banks to Lose or Write Down $470 billion Thru 2010
Moody’s says both the US banking industry rating outlook and the industry’s broader fundamental credit outlook continue to be negative because of the sharp economic recession that is cutting deeply into US bank balance sheets.
Moody’s states that it expects US rated banks will incur a total of approximately $470 billion (pre-tax) of loan and security losses and write-downs in 2009 and 2010. The lending portion of this estimated loss is $415 billion, or 8% of the industry’s outstanding loans at the end of last year.
As a result of these substantial asset quality problems and the need to build reserves, many US banks will be unprofitable in 2009, placing considerable strain on their capital levels, the rating agency says in its Annual Banking System Outlook for the United States. .Highlighting the key challenge to bank profitability, Moody’s said that, despite heightened provisioning over the past several quarters, banks’ coverage of bad loans continues to drop; the ratio of allowance for loan losses to non-performing loans stood at 70% at March 31, 2009 versus 100% in the first quarter of 2008.
“Under more adverse conditions, numerous US banks could become insolvent by the end of 2010,” said Moody’s. “More specifically, based on our modeling of such an adverse scenario,” the analyst states, “we calculate that US rated banks could incur a total of approximately $640 billion (pre-tax) of loan and security losses and write-downs in 2009/2010; without additional capital, this means that more than a third would fall below investment grade on a standalone basis …”
“Additionally, if the US economy worsens beyond expectations US banks would need to raise significant amounts of additional equity capital. For instance, under this adverse scenario we estimate that recapitalizing all rated banks back to a B- financial strength level would require a $112 billion investment.”
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