Today’s report from Standard & Poor’s on 22 U.S. banks qualifies as a good news/bad news joke: Yes, you bankers are cleaning things up, so stronger capital positions and higher quality balance sheets are in sight, and we appreciate that. But because you’re reducing your leverage and risk-taking, you’re looking at a less profitable business model. So we’re cutting your credit rating.
Today, 18 U.S. banks, some of them quite large, had their credit ratings lowered by S&P. The list included some big names, such as Wells Fargo, PNC, BB&T, and Capital One Financial, as well as my personal favorite name, Fifth Third Corp. (Four banks had their ratings reaffirmed, and 25 were left untouched.)
S&P notes that since June 2007, before the credit crisis began, they have cut ratings on U.S. banks by an average of two notches, to BBB+ from ‘A.’ (Page 10 of this document explains the various grades of Standard & Poor’s credit ratings.)
Some of the concerns of the S&P analytical team, led by Rodrigo Quintanilla, stem from the current recession, that is, that loan losses will come in at rates higher than forecast. Read ‘em and weep:
Based on our current assumptions of a severe U.S. recession bottoming in late 2009 with a GDP decline of 3.9% in 2009 and unemployment reaching 9.7%, we believe that all our rated banks… will suffer a total of $460 billion of loan losses for 2009 and 2010, and $28 billion of securities losses. Considering reserve builds of $144 billion, it is very clear that the projected $512 billion in preprovision operating earnings during these two years will not offset these charges, so that most banks will not be profitable in those years.
Translation: Banks’ expected credit losses for this year and next are $488 billion, but profits projected to be available to absorb them are $368 billion.
But S&P is equally concerned about the industry’s long-run outlook. From a June 17 press release:
“We believe the banking industry is undergoing a structural transformation that may include radical changes with permanent repercussions,” said Standard & Poor’s credit analyst Rodrigo Quintanilla. “Financial institutions are now shedding balance-sheet risk and altering funding profiles and strategies for the marketplace’s new reality. Such a transition period justifies lower ratings as industry players implement changes.” Possible changes include increased regulatory oversight and lower profitability.
But the banks were just doing what everyone had asked. After the release from S&P, bank stocks sold off about three percent on the day.
