Energy Finance

Although government financial support has buoyed U.S. banks, the industry will likely experience overall credit quality deterioration through at least 2009, according to Jeff Sexton, New York-based analyst with Standard & Poor’s Ratings Services.

“Our current ratings outlook for the industry is negative, mainly reflecting deteriorating economic conditions and mounting asset-quality problems,” he says. “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.” My goodness.

Furthermore, “”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,” says S&P 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.”

S&P 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.

Capital will be key to the industry’s resilience again in 2009. Banks will continue to be subject to global market concerns about systemic shocks (system-wide liquidity and counterparty confidence risks) through at least early 2009, although the U.S. government’s safety net programs such as the U.S. Treasury’s Troubled Asset Relief Program will act as a backstop.

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