Some Dark Clouds Are Dispersing As Downgrades Taper Off for Banks

Credit downgrades among banks tapered off in the third quarter, a further sign that banks' troubles may be winding down.

"You don't have to have a PhD in economics to determine that there might be an improvement," said John Lonski, senior economist at Moody's Investors Services.

Moody's downgraded 10 bank issues in the latest quarter, the same number of issues downgraded in the second quarter. The dollar volume, however, was lower: $2.4 billion instead of $3.2 billion. And only seven banks were affected in the latest period.

Both periods were a vast improvement over the first quarter, when Moody's downgraded 18 banks and $46.97 billion. About $40 billion of that sum was owed by Citicorp and Wells Fargo & Co. Even excluding those two companies, the first quarter was worse than either of the two that followed, Mr. Lonski said.

Moody's main rival, Standard & Poor's Corp., lowered ratings on just six banks in the third quarter, down from seven cuts in the second quarter and 24 in the first.

The slackening pace of bad news is evidence that credit-rating agencies foresee less deterioration in banks' asset quality in the coming months.

Noticeably Different from '90

"They've downgraded people so heavily and so many times that I think they're pretty much done unless there's some major event," said Ann Robinson, an analyst at Donaldson, Lufkin & Jenrette.

And it marks a dramatic change from 1990, when Standard & Poor's cut ratings on 56 banks and upgraded only four. Moody's downgraded a whopping 93 banks last year and raised ratings on just five.

The easing is good news for companies who have put off raising new capital since the downward rush began almost two years ago.

Lower ratings and the credit quality problems they signaled made investors shy away from bank securities in 1990. As a result, banks raised just a fraction of the capital they had in previous years: A mere $2.6 billion in bank debt was issued and less than $1 billion each in common and preferred stock - and most companies paid steep prices to sell what they did.

Capital Growing Affordable

This year, though, the pace of downgrades is slowing, and banks are jumping back into the capital markets. Already, banks have issued $11.3 billion in debt, $2.5 billion in common equity, and $3.27 billion in preferred stock, according to Securities Data Co., an affiliate of the American Banker. And the rates they have paid for capital have improved in many cases.

For example, BankAmerica Corp. issued subordinated debt repeatedly throughout the first half of the year, and each time the San Francisco bank was able to price the securities at a smaller premium over Treasury rates.

"We anticipated that, through 1991, the trend would start to improve," said Edward Thompson, a vice president at Thomson BankWatch, also an American Banker affiliate. Now, in the third quarter, "the tide seems to be turning. In certain areas of the country, the bottom has been reached." Thomson BankWatch actually upgraded more banks than it downgraded in the third quarter, after downgrading 163 banks in 1990.

Too Early for Upward Rush

To be sure, the median ratings for the banking industry today are lower than they ever have been. At Thomson, the median rating is down close to a full grade. That means the rating agencies are backing off at a time when many banks are left having to contend with ratings at record lows.

Moreover, no one is suggesting that a rash of upgrades will begin any time soon.

"I wouldn't say they've changed their attitude," said Thomas Richlovsky, treasurer of Cleveland-based National City Corp. "There's still a lot of suspicion about the direction of asset quality."

But the relative stability is a boon for many banks, even if it is setting in with ratings at low levels.

In addition, the rate of bank upgrades is starting to increase slightly. Moody's raised ratings on seven banks in the third quarter, up from four in the second quarter and zero in the first quarter. Standard & Poor's Corp. upgraded no banks in the third quarter, but it raised ratings on three in the second quarter and one in the first quarter. And Thomson BankWatch upgraded 18 banks in the three months ending in September.

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