Fitch: U.S. Banking Sector Stable into 2005.

NEW YORK -- U.S. banks going into 2005 are well positioned in asset quality, liquidity and, to a large extent, capital but organic revenue growth remains a significant challenge for most of these institutions, particularly as net interest margins are compressed by unusually low interest rates, according to Fitch Ratings. However, this challenge may be short-lived as the Federal Reserve may continue to raise rates.

Indeed, today, in a year-end report 'U.S. Banking Outlook' released by Fitch, rising interest rates look to be both a blessing and a curse for the upcoming year. While higher interest rates will allow many banks to benefit from a cost advantage of accumulated core deposits in a higher interest rate environment, continued rate hikes will have a dampening effect on residential mortgage banking and potentially on asset quality. Most at risk are consumer loans with adjustable rates, particularly those not real estate secured or those made to consumers most poorly positioned for higher cash flow requirements.

'But, assuming rates rise at a measured pace, as has been suggested by the Federal Reserve Chairman, we anticipate that banks will calibrate the pace and degree of deposit rate increases to lag rises in the institutional marketplace which should yield some net interest margin relief,' said Sharon Haas, Managing Director, Fitch Ratings.

Additionally, Fitch has and will continue to watch the performance of some of new, more aggressive mortgage products, including those that combine a relatively high loan-to-value with interest only payments or very low teaser rates, for example. The Fitch report notes that middle market commercial customers who are heavily indebted, or heavily reliant on unhedged fuel as part of their production process, must bear close monitoring as well. But, to date, neither of these segments has really shown any significant sign of portending disaster since, fortunately, most middle market commercial customers have been reducing their debt levels aggressively since the latter part of 2001.

'Fitch envisions that 2005 will look a lot like 2004, albeit with a changing interest rate environment contributing to a modification in the composition of earnings and expenses,' Haas added. 'Expect mergers and acquisitions to continue apace both among US banks and other US companies, as well as between US banks and non-US buyers.'

Fitch Ratings' 'U.S. Banking Outlook 2005' is available on the Fitch Ratings web site at www.fitchratings.com.