Banking on Downgrades: S&P’s Review

It nails 10 regional institutions with either outright rating cuts, moves to CreditWatch, or negative outlook shifts.

Standard & Poor’s completed a review of the banking sector, and it didn’t like what it found. The rating agency announced negative actions on 10 U.S. regional banks.

The rating agency said its sector portfolio focused on the sensitivity of earnings and capital to potentially severe levels of loss on housing-related loans — single family, home equity, and residential construction loans — as well as on commercial real estate loans.

S&P downgraded two banks: National City and First Horizon National. It placed two on CreditWatch with negative implications: Citizens Republic Bancorp and Fifth Third Bancorp. And it changed its outlook to negative on six more: Regions Financial Corp., Comerica Inc., Synovus Financial, Wilmington Trust, Zions Bancorporation, and Colonial BancGroup.

Nine U.S. regional banks that were reviewed already carried negative outlooks, S&P noted. Thus, fully 37 percent of all regional banks now have negative outlooks or CreditWatch negatives.

“We took the negative rating actions on these 10 banks because of the pressures we see arising from their exposures to the housing markets and because of our outlook for potential deterioration in other asset classes,” S&P said in a report. It added that these banks have above-average levels of nonperforming assets or heightened net charge-off levels. These conditions largely result from riskier underwriting standards or activities in the most distressed real estate markets in Florida, California, Arizona, Nevada, or the Midwest.

For example, National City, First Horizon, Citizens Republic, Comerica, Fifth Third, M&I, and Regions Bancorp. have nonperforming and net charge-off levels well above the median in their first and junior mortgage portfolios, as well as in their residential construction portfolios.

S&P warned that asset quality problems are poised to reach higher levels and are likely to exert more pressure on earnings and capital. In particular, Citizens Republic’s exposures in the Midwest and problems it inherited from an acquisition have pushed its ratios quite high, S&P noted. As a result, “stabilization is not assured,” it asserted.

Similarly, for National City, S&P said that loan quality could deteriorate for the next several quarters.

In Provident’s case, asset quality problems in the securities portfolios rather than in the loan portfolios played a role in its negative outlook, the rating agency explained.

“In general, we have built less tolerance for below-average performance into the higher ratings,” it said.

In contrast, others, such as BB&T, that have some of the same risky exposures and above-average loan problems but strong underlying earnings and capital were not affected, S&P explained.

It pointed out that Associated Banc Corp. has lived with high levels of loan problems for a long time and may be mostly through them, so its rating outlook was left unchanged.

Also, those banks with high levels of capital or strong underlying profitability should be capable of managing through the cycle at current rating levels despite high exposures to the housing markets, it stressed.

And others, like NY Community, are not exposed to the riskiest segments of commercial real estate even though their exposure to that general asset class is high.

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