U.S. Bank Lending Below Depression-Era Levels: S&P

Outlook upbeat for U.S. corporate debt and stock, but European banking crisis still looms

U.S. bank loans are at such record lows that they have done little to contribute to the nation’s economic recovery, the head of financial institutions ratings at Standard & Poor's said Wednesday in New York at an S&P Capital IQ cross-asset conference.

Federal Deposit Insurance Corp. data shows that U.S. loan growth to nominal GDP has stood at an historically low multiple of 0.31 since the banking crash of 2008, compared with its high of 1.75 from 2001 to 2008, said Rodrigo Quintanilla, head of research for North American Financial Institutions Ratings. This compares with a multiple of 0.64 in the 1930s during the worst of the Great Depression, Quintanilla said.

“We believe the U.S. banking industry is undergoing the most radical structural change since the Great Depression,” he said.

As of March 13, S&P’s rating outlook on 56 U.S. banks showed recent downgrades at 30%, upgrades at 11% and 59% unchanged. Of the banking universe, 24% have a negative outlook, 4% are positive, and 72% are stable. No bank has a triple-A rating from S&P; the highest rating is A+, which is four grades below triple-A.

“If the Occupy Wall Street people saw this number, they’d have a field day with it,” said one commenter in the audience during the conference’s question-and-answer session.

U.S. Banking in ‘Radical’ Transition, but Stock Buyers Are Happy

Quintanilla concluded that U.S. banks are an industry in transition, struggling in the face of:

  • Increased regulation, supervision and enforcement
  • Business models that may change radically
  • Consolidation of weaker and smaller entities
  • Leveling of the playing field between regulated and non-regulated U.S. financial institutions

The gloomy picture for banks stands in sharp contrast to the overall outlook for U.S. corporate debt and equities, according to S&P Capital IQ analysts.

With the economy in recovery, investors are taking on more risk in 2012, said Robert Keiser, vice president of Global Markets Intelligence, who views the markets globally as “risk on.” U.S. corporate debt with a triple-B or A rating is outperforming the market, while S&P 500 corporations overall have a low risk of default, he said.

The consensus view for the S&P 500 stock index predicts a fourth-quarter 2012 growth rate of 15.5% for all sectors, three times higher than the third-quarter prediction of 5.8%. And clearly, stock investors are positive on banks — consensus on the financials sector predicts fourth-quarter growth of 25.9% and third-quarter growth of 9.1%.

European Headwinds

To be sure, all markets along with U.S. banks continue to face headwinds from Europe as the euro zone sovereign debt crisis continues to drive global macro uncertainty.

Looking at euro zone sovereign ratings as of March 12, Quintanilla said they were far from upbeat. “What jumps out is the very high number of negative outlooks,” Quintanilla said, noting that the only positive outlooks go to Germany and the Slovak Republic.

Marie Cavanaugh, an S&P sovereign credit analyst with more than 20 years at the agency and a member of the company's criteria committee, spoke in measured tones about how the euro zone’s existing policy is insufficient to address the region’s sovereign debt issues.

Yet Cavanaugh’s message was clear: Europe’s fiscal future is dire. Standard & Poor’s on Jan. 13 completed a review of 16 euro zone sovereigns and ended up downgrading nine of them.

“We received a lot of criticism at the time from people who said we didn’t understand the euro zone’s problems,” she said, adding that S&P is not backing down from its negative view of European sovereign debt. “It’s a negative trend, to put it mildly.”

Cavanaugh wasn’t much more encouraging about the United States’ sovereign debt problems. The burden of U.S. government debt and interest as a percentage of GDP totaled about 65% but is on track to exceed 80% by 2014, she said. In contrast, China’s debt to GDP is now at about 15%, and S&P sees it less than zero in 2014.

Read Goldman’s O’Neill: Economy Getting Back to ‘Normal’ at AdvisorOne.

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