Tuesday, 6 January 2009

S&P Expects a Deterioration in Credit Quality at U.S. Banks. Is Their Position That Worrisome?

Standard and Poor's just published the abstract of a report, in which it analyses the recent performance of the U.S. financial industry in the back of government financial support. Although government financial support has buoyed U.S. banks, S&P says, ''the industry will likely experience overall credit quality deterioration through at least 2009.´´ let's remember a note that we posted at the end of December, in which the ratings company ranked its ratings outlook for the industry as negative, mainly reflecting deteriorating economic conditions and mounting asset-quality problems.

The situation of the U.S. financial sector is, therefore, quite worrisome. Loan credit costs should increase (because the creditworthiness of both borrowers and creditors is deteriorating amid the worst recession since at least WWII) and the necessary loan-loss provisioning will further eat into profits. S&P says that the government intervention in the industry won't prevent bankruptcies or cash shortages at small- and mid-sized institutions. Some of them may let go because they don't represent systemic failure risk (I have no names unfortunately.) On the same token, bank failures may rise this year. The impact on confidence must be significant -- because it will create the perception among the public that the hundreds of billions of dollars poured into bailouts and similar programmes aren't stopping the hemorrhage.

S&P is also betting that ''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.´´ This is important -- because it means that banks might have to continue writing off, selling or spinning off assets that are part of their core business. Let's remember that banks around the world were forced to write down about $800 billion stemming from credit-related losses last year, according to Bloomberg.

Mr. Obama has a tough road ahead of himself.

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