S&P analyst says U.S. banks strong

By Dan Wilchins

NEW YORK (Reuters) - U.S. banks and brokers are entering this credit downturn with strong capital levels, and many of their ratings should hold at current levels assuming the credit downturn is a normal one, Standard & Poor's ratings analyst Tanya Azarchs said Thursday.

Banks and brokers face selective credit rating downgrades should one perform worse than its peers, or if the credit cycle became much worse, Azarchs said at the Reuters Finance Summit in New York. Ratings downgrades can lift a company's borrowing costs and crimp earnings.

Right now, S&P expects the credit cycle downturn to be normal, although consumer credit should suffer a little more than in previous downturns, Azarchs said.

"It's easy to get into a panic about it, and we don't think there's anything to panic about," Azarchs said.

Bond investors are not so sure that ratings are safe. According to the credit strategy group of S&P competitor Moody's Investors Service, bonds for many banks and brokers are trading at prices that imply much lower ratings than they have.

For example, Moody's rates Citigroup Inc's (C.N) senior unsecured debt "Aa2," the third-highest investment grade, similar to the Standard & Poor's level.

But Citi's bonds are trading as though rated five notches lower, at "Baa1," the third-lowest investment grade, according to Moody's.

Rating agencies have already taken steps toward downgrading some banks and brokers. S&P on Thursday changed its outlook on Morgan Stanley (MS.N) to "negative" from "stable," after the investment bank said it will write down $3.7 billion of securities linked to subprime mortgages.

A negative outlook signals a downgrade is more likely over the next six months to two years.

Moody's and Fitch cut Citigroup's debt ratings last week, and S&P said it might do the same.

All three agencies cut Merrill Lynch & Co Inc's MER.N ratings last month.

EARNINGS LIKELY TO FALL

Bank and broker earnings should be lower in 2008 than in 2007, Azarchs said.

"That's not a good message for the equity markets," Azarchs said. But banks and brokers generally appear well-capitalized now, she added.

"We think that ... both the large universal banks and the brokers are coming at this from a position of strength, and ... that's the underpinning for everything we do going forward," Azarchs said.