RPT-Fitch fundamentals index rises to +2 despite mortgage slowdown

Wed Jan 15, 2014 9:20am EST

Jan 15 (Reuters) - (The following statement was released by the rating agency)

The Fitch Fundamentals Index (FFI) remained in neutral territory but rose to +2 in the fourth-quarter 2013 (4Q'13) from zero in 3Q'13, indicating a small improvement in underlying credit fundamentals, including ratings outlooks, corporate defaults, credit default spreads and transportation.

"On the positive side, we saw an uptick in the rating outlook component due in part to positive outlook revisions on US regional banks. This brings Fitch's rating outlook negative-to-positive ratio almost into parity, four years after negative outlooks outnumbered the positive 10 to one," said Jeremy Carter, Fitch Ratings Managing Director.

"On the negative side, US mortgage delinquencies increased slightly due to rising interest rates and a deceleration in home prices, which pushed the mortgage performance component to neutral and ended its 15 quarter positive run."

Quarter-over-quarter, positive FFI credit fundamental components outweigh negative by six to three, with one at neutral.

Regional Bank Outlooks Drive Ratings Outlook Score Positive

The FFI ratings outlook component score rose to +5 in 4Q'13 from zero in 3Q'13, its first time in positive territory since 1Q'13. The score reflects positive ratings outlook revisions and upgrades for large US regional banks on stronger profitability and capital positions, and better asset quality.

US Corporates saw its number of negative outlooks drop to 76 from 87, while positive outlooks and ratings watches remained stable.

Since 3Q'12, the aggregate negative-to-positive outlook ratio has fallen to 1.17 from 2.03. Negative outlooks and watches for financial institutions dropped to 39 from 53, while positive outlooks and watches increased from 33 to 49.

Mortgage Delinquencies Rise for First Time Since 1Q'12

The FFI mortgage performance component score fell to zero, or neutral, in 4Q'13 from +5 in 3Q'13 due to a slight decline in prime mortgage performance. U.S. residential mortgage delinquencies started to stabilize from 3Q'10 peaking at 12.48% in 1Q'12 and steadily falling to 10.45% in 3Q'13 before rising to 10.54% last quarter. The mild uptick this quarter marks the first increase since 1Q'12.

Long-term, the mortgage performance score remains at +10 year-over-year. This trend is driven by a growing US economy and substantial regional housing market price increases, which indicates borrowers previously underwater are able to refinance and sell.

Restrained Growth Stifles Capex Forecasts

The capital expenditure (capex) component score remained at -5 due to restrained growth-related spending plans and reduced capital intensity among US corporates. Limited revenue growth and diminishing cost reduction opportunities turned the EBITDA forecast component negative, to -5, from neutral the prior quarter. Fitch forecasts a 1.6 percent average annual drop in capex during 2014 for a sample of US corporations due to uncertain global growth, regulatory and fiscal policy concerns, and a return to demand-driven spending.

The capex pull-back follows high spending levels during 2011-2012, as companies made catch-up investments post-recession.

Fitch Fundamentals Index

The Fitch Fundamentals Index (FFI) tracks changes in credit fundamentals across key sectors of the U.S. economy. Analyzing the relative strength or weakness of the index or its sub components can provide insight into how conducive conditions in the U.S. are towards economic growth.

The trend in potential drivers or constraints on economic growth or decline is indicated by the relative strength or weakness of the FFI, ranging from +10 to -10. The FFI's components include mortgage and credit card performance, corporate defaults, high-yield recoveries, ratings outlooks, EBITDA and CapEx forecasts, banks, the CDS outlook, and transportation trend. Released quarterly, the FFI relies primarily on proprietary Fitch-sourced data.

To learn more about the FFI, please visit 'www.thewhyforum.com/ffi'.

Link to Fitch Ratings' Report: Fitch Fundamentals Index

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