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US bank asset quality on the downhill side.

In its latest quarterly report on the fundamental credit conditions of the US banking system, Moody's Investors Service said that although US-rated bank asset quality continues to improve, the credit outlook for the US banking industry continues to be negative.

"Asset quality indicators have improved for four consecutive quarters," said Moody's Managing Director Robert Young. "However, charge-offs and non-performers remain near historic highs and are not improving as quickly as they deteriorated in 2009."

"We estimate rated US banks have recognised over two-thirds of the aggregate loan charge-offs that they will realise from 2008 to 2011," said Young. "Although sizeable, the remaining losses look manageable in relation to these banks' pre-provision income, loan loss allowances and tangible common equity."

Moody's expects the return to normal levels of credit conditions will be slow and uneven through the next twelve to eighteen months. However, a worsening of the global economy in 2011 would significantly strain US bank fundamental credit quality and ratings absent mitigating actions to bolster capital.

More generally, this report discusses the actual loss experience for rated US banks through the second quarter of 2010 in comparison to Moody's estimates, and the fundamental credit conditions of the US banking industry.

Report highlights:

-- Loan charge-offs have decreased on an aggregate basis for four consecutive quarters and were 2.7 per cent of loans in 3Q10, the lowest level relative to loans since 1Q09, but still near historic highs. All major categories showed improvement in charge-offs during the third quarter with the exception of commercial real estate (CRE), which increased modestly on a percentage basis.

-- Non-performing loans were approximately 4.5 per cent of loans at 30 September 2010, the lowest level since the 1Q09.

-- Moody's estimates that rated US banks will incur $744 billion of loan charge-offs between 2008 and 2011. "We estimate $497 billion of these losses have been recognised leaving $247 billion, or 33 per cent, remaining. On an asset class basis, Moody's estimates 72 per cent of residential mortgage losses have been taken versus 54 per cent for commercial real estate,' it said.

-- The US banks' loan loss allowance stood at $203 billion (3.9 per cent of loans) and tangible common equity was $642 billion at September 30, 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, would significantly strain US bank fundamental credit quality," the rating agency said.

The report is titled ' U.S. Bank Asset Quality: On the Downhill Side but Moving Slowly .'

2009 CPI Financial. All rights reserved.

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Publication:CPI Financial
Date:Dec 23, 2010
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