S&P downgrades 18 US banks to reflect 'new reality'

New York-based rating agency Standard & Poor's (S&P) has cut its ratings on 18 US banks - a decision reflecting less-favourable operating conditions, greater volatility in financial markets and tighter regulatory supervision, according to the firm.

The downgrades form part of an ongoing reassessment of risk in the financial industry, according to S&P, which saw it revisit the ratings of 22 regional US banks in total. Of these, 18 banks had their senior debt ratings downgraded by the agency.

Victims of downgrades included a number of banks that lost out during the recent stress tests conducted by US banking regulators, including KeyCorp, Regions Financial and Wells Fargo. Five other banks were lowered to below investment-grade.

Rodrigo Quintanilla, a New York-based credit analyst at S&P, said the moves responded to a structural transformation taking place in the industry. "Financial institutions are now shedding balance-sheet risk and altering funding profiles and strategies for the marketplace's new reality," he said. Lower ratings were merited by the prospect of greater regulatory scrutiny and reduced profitability, the agency suggested.

According to S&P, the rating changes also demonstrate its recognition of the industry's sensitivity to confidence after the liquidity stresses of 2008. This was particularly acute for investment banking and trust or derivatives activity - leading to an emphasis by the agency on core deposit funding, diversity of funding and robust liquidity management.

Nineteen of the banks remain on negative outlook. "The high number of firms with negative outlooks suggests that ratings could still decline if the credit cycle is longer and deeper [than expected]," said Quintanilla. The agency's continuing worries include the scaling back of government support to many banks, as well as large exposures to credit and depressed regional economies.

Under its base-case scenario, S&P estimates US banks will suffer $460 billion of loan losses and $28 billion of securities losses in 2009 and 2010. When adjusted for increases in reserves of $144 billion, this would render most banks unprofitable during this period.

The latest downgrades mean S&P's counterparty ratings on US banks have fallen an average of two notches since June 2007. The average counterparty rating for US banks is now BBB+, compared with A two years ago, according to the agency.

The decline might have been worse had it not been for the success of banks at raising common capital following the stress tests conducted by regulators, the agency suggested.

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