S&P Says Worst Problems of Global Banks Are Behind Them

Standard & Poor’s believes that global banks’ biggest problems are behind them and that the fourth quarter of 2008 and first quarter of 2009 marked the bottom.

“While U.S. banks in virtually every major market are feeling the severe effects of both the weak economy and their own mounting credit losses, we believe global banks’ securities-related businesses have already seen the worst,” S&P says in a new report. “The current downturn hit these businesses first on several fronts. Among the problem areas were asset-backed securities (ABS), collateralized debt obligations (CDOs), residential mortgage-backed securities (RMBS), and monoline-related and leveraged finance positions. Also crimping the global banks’ results were a drastic slowdown in business activity, which began playing out in mid-2007 and accelerated through late 2008.”

However, we now think that fourth-quarter 2008 likely marked the trough for these banks’ trading operations and that first–quarter 2009 has seen the bottom for their investment banking, asset management, and wealth management businesses.

S&P recently revised our 2009-2010 revenue assumptions for these four key business lines. These assumptions serve as starting points in S&P’s analysis of the related businesses of the global banks, namely: Bank of America Corp. (BAC), Barclays Bank PLC (BCS), Citigroup Inc. (C), Credit Suisse (CS), Deutsche Bank AG (DB), The Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM), Morgan Stanley (MS), and UBS AG (UBS).

“Our belief that these issuers’ securities-related businesses have bottomed out should help to relieve downward pressure on their ratings. However, we anticipate that, in some cases, escalating credit losses will more than offset any benefits from improving securities-related results.”

S&P assumes that overall investment banking revenues will be about the same in 2009 as in 2008–about 30% lower than in 2007. “We do see some potential for at least modest improvement in 2010 compared with 2009, on the order of a 10%-15% increase in year-to-year revenues.”