S&P Analysts Say Pressure On Earnings Will Continue

The U.S. banking market continues to be oversaturated, decentralized, and fragmented, Standard & Poor's analysts said in a New York conference last week.

Speaking Thursday at the all-day seminar, S&P director Xavier Chavee said that as a result, U.S. banks would continue to suffer pressure on earnings.

Mr. Chavee added that mergers had apparently no evident impact on improving operating efficiency. He said that part of the reason may be the high initial expenses involved in a consolidation.

In a broad overview of banking developments worldwide, Standard & Poor's managing director Michael DeStefano said that the outlook for the more than 100 U.S. bank holding companies rated by the agency was about 80% stable and 20% split between positive and negative.

"The fact is many U.S. financial institutions have a positive outlook," he said.

He added that the negatives affected mainly smaller regional and trust institutions such as U.S. Trust Corp. and United Missouri Bancshares.

Mr. DeStefano, however, pointed out that there is now "greater velocity" in net interest margins at U.S. banks.

He said that interest rate risk, compared to what it was five or 10 years ago, had increased significantly for banks as a result of the takeover of thrifts and an expansion in mortgage originations. "Around 20% of commercial bank assets are in mortgage-related assets," Mr. DeStefano said.

As a result, banks are now seeing a drag in their net interest margins.

The analyst stressed that this would not affect S&P's ratings because the interest rate risks had already been discounted.

Turning to asset quality, the analyst said it was "extraordinarily good" at banks even if they are likely to increase their provisioning in the future.

One reason for the improved asset quality is that banks have avoided a concentration in lending to leveraged buyouts, energy, and real estate.

The only area of some concern, he said, is credit cards - should the U.S. economy go into a recession and unemployment rise.

Capitalization, another measure of creditworthiness, is strong at most of the banks Standard & Poor's follows.

Paradoxically, however, Mr. DeStefano said that stock buyback programs have been releveraging capital at major banks - one of the main reasons S&P has not issued upgrades more quickly.

The analyst also stressed that S&P does not upgrade on merger announcements. "We tend to wait for a combination to improve itself over time."

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