The current recession is expected to last at least into the second half of 2009, and the result of that may be an ongoing deterioration of asset quality, thereby “revealing the inadequacy of loan loss reserves and impairing profitability within the bank and finance sector,” write analysts in Barclays Capital’s fixed-income research group.
Banks were hit by a storm in 2008. Problematic loans, exposure to asset-backed securities that plunged in value, counterparty risk, and a drying-up of the lending markets caused a panic through the sector, reducing the financial sector’s market capitalization as a percentage of the Standard & Poor’s 500-stock index to 13.1% as of Thursday, down from a peak of 20.1% in October of 2007. Banks have still not recovered, though the support of the various Federal Reserve lending facilities, and the backing of the U.S. government, has helped.
Standard & Poor’s Ratings Services cut its ratings on 11 U.S. and European banks Thursday due to the expected pressure on future performance, which Barclays also alluded to in its report. Barclays analysts anticipate that non-performing assets for the firm’s 27-bank aggregate will rise to more than $200 billion in the fourth quarter of 2009, and banks will have to increase loan loss reserves — money set aside to cover bad debts. Loan loss reserves are now about 118% of nonperforming assets, compared with about 230% of these assets in the fourth quarter of 2006.
“Given the prospect of a deeper economic contraction and a decline in loan loss reserves as a percentage of nonperforming assets, we see asset quality and loss reserve adequacy as key themes in 2009,” they write. In particular, companies such as American Express, Capital One, GE Capital, and Wells Fargo, which have the largest exposures to consumer, construction and commercial real estate loans are subject “to the most potential deterioration in 2009.”
http://blogs.wsj.com/marketbeat/2008/12/19/for-banks-2008-stunk-will-2009-be-much-better/
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