Bank Credit Ratings: Fewer Downgrades

Quarterly downgrades of bank credit ratings are running at less than half their 1990 pace, according to Moody's Investors Service and Standard & Poor's Corp.

"The pace definitely has slowed down," said Michael DeStefano, a vice president of financial institutions at S&P.

That's encouraging news for banks, whose cost of capital goes up when ratings go down.

Mr. DeStefano said that through the first quarter and throughout 1990, S&P had been downgrading the debt of about 15 U.S. bank holding companies each quarter. He said S&P downgraded only six banks in the second quarter.

Moody's Investors Service downgraded 80 U.S. bank holding companies in 1990 and 10 in January 1991. In the five months since then, analysts there have downgraded 12 institutions, or 2.4 a month.

No Upgrades This Year

But rating experts aren't predicting upgrades before the end of 1992, largely because they are still concerned about banks' weak asset quality and slim profitability.

"Our ratings were too high two years ago," said Christopher Mahoney, an associate director of financial institutions at Moody's. "The ratings we have now will be able to withstand future bad news."

Bankers are more optimistic. Among the stated goals of the post-merger Chemical Banking Corp., for example, is to return its ratings to double-A status.

Troubled Banks Targeted

Recent downgrades were confined to a handful of banks in deep or unexpected trouble.

Southeast Banking was Moody's most recent downgrade, on July 17, following reports that the ailing bank was considering a Federal bailout as a solution to its problems. In that action Moody's dropped its senior debt rating from B3 to Caa.

Midlantic was downgraded a month earlier, on June 17. In that action Moody's dropped its senior debt from B1 to B3.

It took no ratings action earlier this month after Wells Fargo & Co. and Security Pacific Corp. reported large increases in nonperforming assets and when First Interstate Bancorp reported a loss.

S&P downgraded Wells and Security Pacific, making them the agency's most recent downgrades.

Recovery Seen as Far Off

What will it take for the agencies to begin upgrading banks? "Nonperforming assets and provisions will have to come down," said Mr. Mahoney. "We're a long way from that."

While there are signs of a bottom in New England and the Mid-Atlantic recessions, few are forecasting a speedy recovery. Many say the real estate market in and around Washington is still deteriorating.

Furthermore, there are signs that problems in California and the Pacific Northwest may be just beginning.

"The real estate thing hasn't played out fully yet," Mr. Mahoney said. "There are still borrowers running out of money that haven't run out yet.

"The people I talk to say there is no area of the country that doesn't have an office [space] and retail [space] problem," he said.

The Federal Reserve injected temporary reserves into the banking system with $1.5 billion in customer repurchase agreements on Friday, a Fed spokesman said in response to an inquiry.

Many economists had looked for the Fed to refrain, citing a funds rate of 5.75%, in line with the current presumed Fed target. Economists also were surprised because the Fed intervened aggressively Thursday, injecting $3 billion in reserves.

Funds averaged 5.83% Thursday and 5.75% Friday. U.S. Treasury bonds firmed at midday on some short-covering by professional players after an initial boost from Thursday's sluggish money supply data.

"There is no apparent influx of demand from customers, so dealers must be covering shorts and getting a little closer to shore ahead of the weekend," said one economist at a dealer.

The 8.125% 30-year bond was up 15.6 cents to $96.31 to yield 8.46% after a closing yield Thursday of 8.48%

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