Standard & Poor’s: Credit FAQ: Second-Quarter U.S. Bank Teleconference: Fundamentals Continue To Improve, But Challenges Loom

S&P sees higher interest rates improving interest margins for banks later this year. That’s funny because Ben Bernanke, the guy who sets interest rate policy recently announced rates will be held lower for longer until 2013. Moreover the Fed is more than likely to extend the maturity profile of it’s current portfolio which would have an effect of capping long term interest rates. Hmmm, I wonder who will be right?

From Standard & Poor’s Credit FAQ: Second-Quarter U.S. Bank Teleconference: Fundamentals Continue To Improve, But Challenges Loom
Albrecht, Matthew
23 Aug 2011

The measured recovery for U.S. banks during the past year continued in second-quarter 2011: Asset quality improved, reported earnings were higher, and capital strengthened, causing all rating activity to turn positive for the first time in a year. The second quarter was the first in the past four periods in which Standard & Poor’s Ratings Services didn’t lower any U.S. bank rating or revise any outlook to negative. But a sluggish economy, ongoing issues related to troubled residential mortgages, and potential fallout from the European sovereign debt crisis could weigh on the recovery in the second half of the year. In addition, while our Aug. 5, 2011, downgrade of the long-term U.S. sovereign credit rating to ‘AA+’ from ‘AAA’ has no direct implications for the banking industry, the impact of the financial markets’ reaction is more difficult to predict.

These were some of the key issues analysts discussed at Standard & Poor’s Aug. 9, 2011, Second-Quarter U.S. Bank Teleconference in New York City. Here are answers to some frequently asked questions that came out of the conference:

How does the downgrade of the long-term U.S. sovereign credit rating affect ratings in the bank sector?

The sovereign downgrade had no direct or immediate impact on U.S. bank ratings. No U.S. bank has an issuer credit rating higher than the sovereign rating. Moreover, the sovereign downgrade does not alter the government support assumptions that we factor into our ratings on four large systemically important U.S. banks: Citigroup Inc., Bank of America Corp., The Goldman Sachs Group Inc., and Morgan Stanley.

Does the sovereign downgrade affect Standard & Poor’s BICRA ranking on the U.S.?

No. A Banking Industry Country Risk Assessment (BICRA) ranking, which is our evaluation of the strengths and weaknesses of a country’s banking system compared with those of other countries, reflects the general creditworthiness of a country’s banking industry and signals the system-wide risk for banks in a particular nation. The scale ranges from Group 1 (strongest) to Group 10 (weakest). Under our criteria, the sovereign downgrade does not affect the U.S. Group 3 BICRA ranking.

Did loan growth pick up at all compared with previous quarters? And how are recent growth trends affecting revenues?

Loan growth at the large, complex banks has been relatively flat during the past year, and this trend—-which we believe will characterize 2011 as a whole—-continued in the second quarter. We see the potential for improvement if the economy continues to recover. Specifically, commercial and industrial loans are growing modestly, consumer loan volume has been stable, and real estate loans continue to contract.

The impact of slow-growing, stagnant, or declining loan volumes, combined with the run-off of higher-yielding assets and low-yielding liquid assets on banks’ balance sheets, has caused net interest margins to shrink at many banks. We expect to see a 5%-6% decline in operating revenues for the sector in 2011 and a 22% drop in preprovision operating income. We believe, however, that margins could stabilize later in 2011 when demand for loans picks up and rates increase.

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