Bleak Outlook for U.S. Banks Through 2009

Although government financial support has buoyed U.S. banks, the industry will likely experience overall credit quality deterioration through at least 2009, according to Standard & Poor’s U.S. Banking Industry Outlook 2009.

As the recession deepens, Standard & Poor’s expects a further increase in loan credit costs and continued high loan-loss provisioning to eat into bank earnings.

“We expect government programs such as capital injections and debt guarantees to largely support the banking system as a whole, but they will not serve as a panacea for all U.S. banks, particularly midsize and smaller institutions that the government does not recognize as systemically important,” said Standard & Poor’s credit analyst Barbara Duberstein.

As in other credit cycle downturns, the number of bank failures will likely rise in 2009 from an already high number in 2008, in our view.

Standard & Poor’s expects nonperforming loans and loan net charge-offs to continue to rise into 2009 and 2010. In addition, 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.

CreditSights thinks that In general bank/broker spreads should benefit from systemic support measures, while fundamentals remain extremely challenging .

Most of our bank/broker universe has required capital to withstand higher future provisioning in hot stove areas such as residential and commercial real estate and credit cards among the notables. This capital cushion absorbs the provisioning pain and allows for restoration of more normal banking activities over time.

In its Banks 2009 Outlook, CreditSights recommends:

• For stocks: Maintain Overweight for JPMorgan (NYSE:JPM), Bank of America (NYSA:BAC) as they represent the national brand champion configurations which add stability to operating profiles
• Increase to Overweight from Marketweight Citigroup (NYSE: C) based on stock price that has been oversold compared to its breakup value
• Maintain Marketweight on Goldman Sachs (NYSE:GS), and Morgan Stanley (NYSE:MS) due to revenues challenges and strategic pressures to reinvent as banks

Comments

[who:]

So what is new? In bleak economy people can't pay their bills hence will default. Lending banks will take the hit either default or repackage the repayment terms. And, we are in a very bleak economy.

Jan 07 12:47 PM

[The Good Ne...:]

This is a very misleading article. Twenty or so very large banks have failed. Why? Because they made stupid non-conventional bets to get larger returns on their deposits. Does it follow that all the mid-tier and smaller banks made those same lame bets? I think not.

My favorite example is First Bank of Lakewood Colorado. Have a look at
https://efirstbank.com/advt/ib...

Where they highlight their stability, strength, and service. Not to mention growth.

The fed own data is just not there to support the claim that these mid-tier banks are in trouble or not lending. To the contrary lending is UP at these banks by the Fed's own numbers:
mast-economy.blogspot....

One banker I recently heard said this, "I don't lend to people I don't know and I don't buy paper instruments that I don't understand. Call me conservative, but it has always worked for me. And it's still working well for us now."

And for those 20 that have failed. Lookie there at the S&P chart, how much bad paper did they pass around? Looks like about $375B by that chart. And we've already got that and more on the Fed's balance sheet now.

Don't believe me or the numbers? If you've got a local bank, (not a big bank branch), call the president there. I'm sure he's doing just fine and the deposits there are doing just fine as well.

The bailout is behind us.

GNE

Jan 07 01:13 PM

[12345:]

The bailout is far from behind us. The big Banks have HUNDREDS OF TRILLIONS of Dollars in Derivatives on the books. The printing press will be running full throttle for years trying to cover up this mess.

Jan 07 09:29 PM

[HBWOW:]

I still can't believe the government allowed (?) Goldman Sachs or Morgan Stanley to become banks. Next GMAC will be become a bank (oops, already in the pipeline for consideration), then Sears, Dow Chemical, etc.
Where is the line to be drawn? The best thing about the government bailout is their keen review, decision making, and followup that makes the picture much brighter. Who really is in charge, the Fed, Paulson, FDIC, or SIPC, or a dart thrower?

Jan 08 10:34 AM

[Conan the B...:]

GNE: How could someone believe that a Bank President will take your call in the first place or tell you the truth in the second place? "Yes, we are in deep doodoo, but don't tell anyone else."

When Interest rates were low previously, most of the Mid-tiers probably got on the same bandwagon as the big boys. They were not able to make money on their normal loan portfoilios, so they invested in the Now toxic waste which was previously rated AAA.

Mom and Pop Banks are probably ok. But they are usually not publically traded. The Deposit Accounts are doing fine in All Banks within the $250K FDIC insured limit also.

The refrain "don't worry be happy" does deeper damage to the Public than the Doom and Gloom media.

IMHO

Jan 11 05:19 AM