Although bank credit ratings have stabilized, more banks are likely to be downgraded than upgraded over the next year, Standard & Poor's Corp. said Monday.
The agency's cautious outlook contrasts with the bullishness on Wall Street that has driven up bank stock prices about 30% in the past year.
Investors have taken heart from improved bank earnings, but Standard & Poor's analysts think bad real estate loans will exert a stranglehold on banks for at least two more years.
Spotlight on Asset Quality
Money-center banks, some of which have not set aside sufficient reserves against real estate holdings, will be hit particularly hard, the agency said.
"Of all the asset-quality issues, real estate is the one we are most concerned about," said Michael DeStefano, senior vice president at S&P. "Should an asset-quality issue drive a bank's ratings down, it will be because of real estate."
Of the 30 banks followed by Standard & Poor's the ratings of 22 are stable, seven may be downgraded, and only one, Norwest Corp., may be upgraded.
In a Holding Pattern
Nevertheless, the high number of banks with stable outlooks a turnaround from past years when bad loans triggered a slew of downgrades.
The industry has established a holding pattern on a "weak A" rating the agency said.
Standard & Poor's said it sees no letup in nonperforming real estate assets.
Observes need only look to problems at Olympia & York Developments Ltd. to realize that real estate developers are still floundering.
Even those banks that have had declines in nonperforming assets in the past two quarters may be disguising an influx of new nonperformers by more aggressively charging off older bad loans, the agency said.
Skinny Loan-Loss Reserves
Bank's loan-loss reserves are not fat enough to cushion the blows of potential real estate losses and they will need to increase provisions over the next several quarters.
Standard & Poor's estimates that regional banks have reserves equal to 60% to 80% of nonperforming assets.
Money-center banks generally have thinner cushions - 20% to 30%.
"What is undetermined is the loss experience - how much they have to charge off," said Mr. DeStefano.
Real estate problems in California and the Middle Atlantic states make banks in those regions most likely to be downgraded. The agency said money-center banks, including Citicorp and First Chicago Corp., are vulnerable as well, and both may be downgraded.
Bankers Trust New York Corp., which has an AA rating on its senior debt, may also be considered for a downgrade if its asset quality tumbles or its trading business slips, Standard & Poor's said.
S&P said the other possible downgrades are Barnett Banks Inc., Jacksonville, Fla., because of concerns about its planned acquisition of First Florida Banks Inc., Tampa.
Other possible downgrades include NBD Bancorp Inc., Detriot, also because of merger concerns; Continental Corp., Chicago, because of its concentration on corporate business; and Wells Fargo & Co., San Francisco, because of questionable asset quality.
Still, S&P found some bright spots. Other types of loans have lost their sting. Consumer chargeoffs, at a high for both credit cards and mortgage loans, will fall as the economy mends.
Loans for leveraged buyouts don't have the potential to do much damage because as senior debters, banks tend to recover their investments in bankruptcy court, said Mr. DeStefano.
Banks can benefit from consolidation, which can cut overhead.
Growth in fee-based businesses could help bank's debt ratings, although increasing the contribution of those businesses presents a challenge.
Banks in once-battered New England have pulled themselves out of a credit nose dive, and have had their ratings increased accordingly.
Midwest banks continue to sidestep big real estate problems.
In fact, so far this year, Standard & Poor's has upgraded as many regional banks as it downgraded.Credit rating forecast forbank holding companiesover the next 12 monthsPotential 1upgrades BANKStable 22 BANKSPotential 7downgrades BANKS Source: Standard & Poor's Corp.