NEW YORK Jan 27 Commercial real estate losses
could erode capital at U.S. banks, and ongoing government
support may be necessary, especially if the economy worsens,
Standard & Poor's said on Wednesday.
"We also believe that the combination of elevated
credit costs, higher capital requirements, and weak earnings
could result in additional bank downgrades in 2010," the rating
agency said in a report.
Banks' earnings are an important source for replenishing
capital worn away by credit losses. However, the mortgage and
investment banking revenues that supported earnings during the
first three quarters of 2009 may not be as reliable in upcoming
quarters, S&P said.
New bank fees, including one proposed by President Barack
Obama on Jan. 14, "have the potential to dampen bank earnings
for some time," S&P said. Under Obama's proposal, which would
be levied on firms with more than $50 billion in assets, banks
would have to pay up to $117 billion to reimburse taxpayers for
the financial bailout.
With banks vulnerable to economic trends, "we are concerned
about the potential lack of a political and regulatory road
map," S&P said. "Moreover, we believe that future assistance,
of the type that just played a large role in stabilizing the
financial system, might be difficult--if not impossible--to
marshal in the future."
About $16 trillion in government aid helped stabilize the
financial system during the credit crisis, but future stability
will hinge on economic recovery and the capital markets'
willingness to extend credit once the government steps out, the
rating agency said.
Legislative proposals will support the trend toward more
risk-averse banks, but the transition will not be easy, as
higher capital and liquidity requirements put a burden on some
banks, the rating agency said.
S&P said it expects strains on the economy to decline
thanks to an improving housing market, better consumer and
business confidence and calmer financial markets. Still, the
economic recovery will likely be subpar, resembling a "lazy U."
the agency said.
If that baseline scenario proves out and the credit cycle
continues to improve, banks' credit quality could stabilize by
early 2011, S&P said. However, banks will continue to move
toward lower leverage and greater liquidity, keeping core
operating earnings lower than they were during the boom years,
If the economy performs worse than expected, banks could be
hit with another wave of significant write-downs, "resulting in
a potentially serious threat to weaker banks' capital
positions," the rating agency said.
The falling value of assets ranging from prime mortgages to
commercial real estate loans "could, once again, test
confidence in the banking system," S&P said.
Banks are already facing weakening credit performance of
first-lien mortgage loans and home equity lines of credit and
may have to write down more residential mortgage-backed
securities, S&P said.
Commercial real estate credit quality also continues to
deteriorate, the rating agency said.
"During 2009, this trend contributed significantly to
asset-quality concerns that led us to downgrade 27 banks," S&P
said. "A total of nine banks, approximately 20 percent of our
rated universe, now have speculative-grade ratings" -- BB-plus
(Reporting by Dena Aubin; Editing by Leslie Adler)