Rating agency Standard & Poor’s has downgraded the credit standing of 22 U.S. banks, including some fairly large ones, and reiterated its negative view on the European banking sector in recent reports. S&P expects the global recession to deliver ongoing loan losses to both groups this year and next, but also sees the transition at U.S. banks toward lower leverage and credit risk as a secular downturn in the industry’s profitability.
S&P issued an industry report card on European banks on June 16, addressing the second phase of the global industry’s downturn. (The first phase came in the form of losses on mortgage securities, most of which originated in the U.S., and the second phase is the credit losses arising from the recession caused by the first phase.)
Expecting a four percent drop in Euroland GDP for all of 2009, a continued slump in the U.S. for the year, and deep recessions in Eastern Europe, where many Western European banks have established a presence, banks are in for a long slog:
The lag between the trough in an economic cycle and the peak in corporate defaults is typically about one year. If the first quarter of 2009 indeed turned out to be the trough of the current recession, then corporate and personal defaults would rise for the remainder of 2009 and peak in the first half of 2010. …We believe the real estate construction and shipping industries, as well as the leveraged loan segment, are particularly vulnerable in the current recession. Banks with concentrations in these sectors — for example, Irish banks and Spanish regional savings banks, which have high exposure to the construction industry — will suffer a higher rate of loan loss than the industry average.
Credit losses in Europe for 2008 were double those of 2007, and in some areas they will double again in 2009.
European governments have intervened much as the U.S. Treasury and Fed have, although participation has been voluntary. S&P nonetheless sees current and future government action as essential to keeping the banks afloat.
This chart shows S&P’s upgrades (in orange) and downgrades (in green) of banks since 2002. Notice the increase in downgrades over the last recession.
The European Central Bank released its Financial Stability Review for June 2009, and reached many of the same conclusions as S&P. They forecast rising credit losses for household mortgages and corporate lending, resulting in US$283 billion of additional charges for European banks for 2009 and 2010. These graphs show the ECB’s forecast of losses peaking in late 2009:
So to anyone who has been expecting the export markets to bail out the U.S., you might want to cut your forecasts for the Eurozone.
While pointing out that the path will be rocky, S&P sums up on a positive note:
In the longer term, sector restructuring, balance sheet deleveraging, and a tougher regulatory environment may ultimately lead to improved banking industry creditworthiness.
But as I point out in Part 2 of this post, S&P’s long-term view of the U.S. industry is not as cheerful.
