Fitch: Outlook on U.S. Banking Sector Remains Negative

Fitch Ratings said its outlook for the U.S. banking sector remains negative, although it said many of the factors that put negative pressure on the ratings are easing.

The ratings agency's outlook is mainly focused on regional banks — where a large portion of U.S. Fitch-rated institutions remain on watch for downgrade or have a negative outlook. Fitch warned fundamental financial performance for the banking sector will remain generally weak throughout most of this year, although it said this won't likely result in broad downgrades.

Regional banks are more susceptible to further downgrades than the larger institutions, given their concentration in traditional lending activities and greater exposure to commercial real-estate loans. Fitch continues to view commercial real-estate risk as a key area of concern for the U.S. banking sector.

High levels of losses from consumer-related exposures — to mortgages, home equity loans and credit cards — likely will persist well into the current year, Fitch said. In addition, commercial real-estate exposure will likely necessitate considerable incremental charges this year. And given their lagging effect, Fitch expects that commercial real estate losses will continue to trend higher throughout the year, which will pressure earnings in 2010 and potentially in 2011.

Last month, peer Standard & Poor's Ratings Services made similar observations. It also warned that regional banks are expected to fare much worse than their larger competitors because they tend to have fewer nonbank businesses and tend to be more heavily exposed to commercial real estate, residential mortgages and small business lending--segments that are often geographically concentrated.

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