- The Washington Times - Thursday, June 18, 2009

From combined dispatches

NEW YORK | The credit ratings agency Standard & Poor’s on Wednesday cut ratings on 18 banks amid concern about further weakening in the financial sector.

S&P; said the changes reflected its assessment that volatility will remain in the financial sector and that the industry is expected to face tighter regulatory oversight. S&P; also said loan losses, which have plagued the industry for more than a year, are likely to continue to increase and could grow beyond expectations.

Meanwhile, the rival ratings agency Moody’s Investor Services said the repayment of about $68 billion in bailout money by 10 large banks may seem like a sign of financial strength, but Moody’s warned late Wednesday that it is not in the interest of creditors in the short term.

“The repayments have the immediate effect of lowering capital levels and of shrinking liquidity positions at a time when economic and financial market conditions remain highly unsettled,” Moody’s said.

Moody’s does not expect to lower the ratings of the 10 big banks that made repayments Wednesday, but downgrades may be down the road. If any of the 10 fails to keep enough cash in reserve to absorb potential losses, Moody’s said it may cut its ratings. The same goes for other banks that repay funds received through the bailout program known as the Troubled Asset Relief Program, or TARP.

“TARP repayment should in no way be interpreted as a return to a normal operating environment - significant challenges remain that require vigilance,” Moody’s Vice President Jean-Francois Tremblay wrote in a report. He said the ability to repay follows a period during which banks were able to raise equity capital and issue long-term debt without government backing.

“Nevertheless,” he said, “the negative outlook on the sector reflects our view that banks’ capital and earnings will continue to be under pressure for the remainder of the year and into 2010.”

As the government moves to exit from its “extraordinary support to the financial sector,” Mr. Tremblay said, banks will have to be able to refinance maturing debt or obtain funding on their own. If the capital markets again become erratic, investors are likely to be more discerning about funding banks no longer receiving government support, he said.

American Express Co., Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley, Bank of New York Mellon Corp., US Bancorp, Northern Trust Corp., State Street Corp., BB&T; Corp. and Capital One Financial Corp. each made TARP repayments.

BB&T;, Capital One, Regions Financial Corp. and Wells Fargo & Co. were among the largest banks that saw their ratings cut by S&P.;

Wide-ranging changes to the industry because of the credit crisis and ongoing recession will dramatically alter the banking landscape, S&P; credit analyst Rodrigo Quintanilla said.

“We believe the banking industry is undergoing a structural transformation that may include radical changes with permanent repercussions,” Mr. Quintanilla said. “Financial institutions are now shedding balance-sheet risk and altering funding profiles and strategies for the marketplace’s new reality. Such a transition period justifies lower ratings as industry players implement changes.”

S&P; did note that recent capital-raising efforts in the sector will help defray some of the losses banks are facing.

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