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Moody’s Muddier Outlook On Financials: Soon To Be Ex-NRSRO Sees “Significant Strain On U.S. Financial System”

Courtesy of Tyler Durden

Moody’s has released a new report, titled “U.S. Rated Bank Asset Quality Over the Peak, Lookout for a Bumpy Downhill Ride.” As one can imagine, in its Moody’s notes that Financials’ asset quality is now over the peak, and it is looking for a bumpy downhill ride. (Like anyone can take them seriously). In it the rating agency says: “We believe rated U.S. banks have recognized approximately 60% of the aggregate loan charge-offs that they will realize from 2008 to 2011. Although remaining losses are sizable, they are beginning to look manageable in relation to bank’s loan loss allowances and tangible common equity. However, a worsening of the global economy in 2010, the probability of which Moody’s places at 10% to 20%, would significantly strain U.S. bank fundamental credit quality — and it is this issue that drives our continuing negative outlook for the U.S. banking sector.” Since Moody’s saw 0% chance of the crash of 2008 happening, the reality adjusted probability of a quintuple dip according to the last statement is about 2,000%. Plan your illiterate SPARC “cash cow” HFT workstations accordingly.

Full Moody’s press release:

U.S. Banking Industry Fundamental Credit Conditions – 1Q10

New York, June 02, 2010 — In its latest quarterly report on the fundamental credit conditions of the U.S. banking system, Moody’s Investors Service said that U.S. rated bank asset quality issues are past the peak but charge-offs and non-performers remain near historic highs. “The return to ‘normal’ levels of asset quality will be slow and uneven over the next twelve to eighteen months,” said Moody’s Senior Vice President Craig Emrick.

“We believe rated U.S. banks have recognized approximately 60% of the aggregate loan charge-offs that they will realize from 2008 to 2011. Although remaining losses are sizable, they are beginning to look manageable in relation to bank’s loan loss allowances and tangible common equity,” noted Emrick. However, a worsening of the global economy in 2010, the probability of which Moody’s places at 10% to 20%, would significantly strain U.S. bank fundamental credit quality — and it is this issue that drives our continuing negative outlook for the U.S. banking sector.

More generally, this report reviews the actual loss experience for rated U.S. banks from 2008 through the first quarter of 2010, comparing it with Moody’s earlier estimates, laid alongside the fundamental credit conditions of the U.S. banking industry.

The report’s highlights also include the following:

–The negative outlook for the U.S. banking system is driven by asset quality concerns and effects on profitability and capital. Aggregate annualized net charge-offs came to 3.3% of loans in Q110 (versus 3.6% of loans for Q409 annualized). Despite two consecutive quarters of improvement in charge-offs, they remain near historic highs dating back to the Great Depression.

— The decline in aggregate charge-offs was driven by commercial real estate (CRE) improvement which we believe is likely to reverse in coming quarters. A similar commercial real estate decline was experienced in the first quarter of 2009 before charge-offs accelerated through the rest of the year.

— Non-performing loans remained at 5.0% of loans at March 31, 2010.

— U.S. rated banks have already charged off or written-down $436 billion of loans in 2008, 2009 and Q110, leaving $307 billion to reach our full estimate of $744 billion of loan charge-offs in 2008 through 2011. In aggregate, the banks have recognized 60% of Moody’s estimated total charge-offs and 65% of estimated residential mortgage losses, but only 45% of estimated commercial real estate losses.

–The US banks’ allowances for loan losses stood at $221 billion as of March 31, 2010, which is equal to 4.1% of loans. Although this can be used to offset a sizable portion of remaining charge-offs, banks will still require substantial provisions in 2010.

–We have incorporated our expected loss estimates into our views of banks’ capital adequacy and ratings. However, our rating outlooks, the majority of which remain negative, are influenced by the potential for a worse-than-expected macroeconomic environment. More severe macroeconomic developments, the probability of which we place at 10% to 20%, would significantly strain U.S. bank fundamental credit quality.

The report is titled “U.S. Rated Bank Asset Quality Over the Peak, Lookout for a Bumpy Downhill Ride.”

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