S&P Sees More Stable Ratings Outlooks for US Banks as Credit Quality Firms Up
Standard & Poor’s Ratings Services says it has improved its credit and profit outlook for the banking industry based on the Federal Deposit Insurance Corp.’s (FDIC) recently released industry financial performance data as of first-quarter. The FDIC pointed out that most of the earnings improvement was among the larger banks, and 52% of financial institutions posted earnings growth.
Selected excerpts from The Outlook For U.S. Banks Improves Based On FDIC First-Quarter 2010 Performance Data (Premium)
Slightly more than half of our ratings on U.S. banks have negative outlooks despite signs that credit trends are nearing an inflection point. The trend, however, is toward increasing the number of stable outlooks among rated financial institutions.
Stronger first-quarter 2010 earnings results for rated U.S. banks showed that the upturn in credit quality is firming up.
Although our outlook for the sector is moderately more positive, we do not see a return to a pretax profit margin in the low-to-mid 20% area until 2012, equivalent to that posted in 1992. This is because we expect credit losses to peak sometime between the end of 2010 and early 2011. Losses recognized since 2008 indicate that we are about half way through the credit cycle.
Our revised profit outlook incorporates a less-negative view of credit losses for the industry. Still, we expect financial fundamentals to remain generally weak, with less profitability in 2010 than in 2009 and historically. Although we believe loan-loss provisions will remain elevated, we expect less of a reserve build, with loan-loss provisions more closely matching net losses. A continued steep yield curve, indicative of a recovery, should support a high net interest margin, like that posted in the first quarter. Rising rates and a flattening yield curve could dampen net interest income growth.
In our opinion, credit-quality trends indicate that profitability may be on a rebound, even with the potential negative impact of pending financial regulatory reform legislation, a return of recessionary pressures, and the possible contagion from European weakness. Whether these positive trends will last remains an open question for now. But we believe credit losses will continue to grow, albeit more slowly. Commercial and industrial (C&I) credit losses were the sole exception this quarter, declining for the first time since first-quarter 2006.
(see also U.S. Large Regional Banks’ First-Quarter 2010 Performance Improved, As Credit Deterioration Slowed published May 20.)
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