--Macroeconomic challenges trump banks' ratings changes in past
2.5 years
--U.S. banks are in recovery mode, which is prone to
reversal
--GDP growth likely to be 1.5% to 2.5% in 2012
The outlook for the U.S. banking system remains negative in the
face of macro-economic challenges even as most banks have returned
to profitability since 2010, according to a new report from Moody's
Investors Service.
"Our negative outlook for the U.S. banking system reflects a
challenging domestic operating environment, with prolonged low
interest rates, high unemployment, weak economic growth and fiscal
policy uncertainties," Senior Vice President Sean Jones said. He
added that the threat of contagion stemming from the European
sovereign debt crisis "undermines economic recovery in the U.S. and
exposes banks to a heightened risk of shocks."
Moody's expects that ongoing challenges in the operating
environment will continue to pressure banks over the next 12 to 18
months.
The ratings firm said macroeconomic challenges trump the fact
that its rating outlooks on most U.S. banks have changed to stable
from negative in the past two and a half years, with the common
driver being banks' improved ability to handle risks due to their
larger capital and liquidity buffers.
"U.S. banks remain in recovery mode, which is prone to reversal
if the economy takes a turn for the worse," the firm said.
It said if not for these macroeconomic issues, a stable outlook
on the recovering U.S. banking system would be reasonable given the
improved financial profile of most banks.
Moody's noted banks' nonperforming asset levels are still high,
and legacy issues from the financial crisis will take years to
resolve. It also noted that many banks, especially smaller ones,
still have significant asset concentrations.
In the next 12 to 18 months, Moody's expects a slow recovery of
the U.S. economy, with GDP growth ranging between 1.5% to 2.5% in
2012 and 2% to 3% in 2013.
Although Moody's expects U.S. bank asset quality to improve over
the next 12 to 18 months, it said U.S. banks carry a sizable level
of restructured residential and commercial real estate loans and if
the economy were to severely contract, losses in these portfolios
would jump. However, it also noted that the majority of rated banks
can absorb such a shock thanks to their improved capital levels,
which will remain robust due to higher regulatory capital
requirements.
Moody's said U.S. banking groups' liquidity profiles are a
credit strength, but profitability will remain pressured for at
least the next 12 to 18 months as costs remain high amid tepid loan
growth, depressed capital markets revenue and low interest
rates.
"Combined with higher required levels of capital and liquidity,
these earnings pressures may lead some banks to take more risk in
order to earn their cost of capital," Moody's said.
Moody's calls eight U.S. banks systemically important by virtue
of their size, interconnectedness and difficulty to unwind. These
are Bank of America Corp. (BAC), Bank of New York Mellon Corp.
(BK), Citigroup Inc. (C), Goldman Sachs Group Inc. (GS), JPMorgan
Chase & Co. (JPM), Morgan Stanley (MS), State Street Corp.
(STT) and Wells Fargo & Co. (WFC).
The ratings firm's outlook on these institutions' bank holding
companies' ratings is negative, while the outlook on their bank or
operating subsidiaries' ratings is stable.
"Put simply, we believe government support for creditors of bank
holding companies is becoming less certain and predictable, whereas
support for creditors of the operating entities of large and
complex groups remains sufficiently likely and predictable to
warrant stable outlooks," Moody's said.
Write to Saabira Chaudhuri at saabira.chaudhuri@dowjones.com
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