Colin Barr

Following the money in banking, economics, and Washington

S&P: Bank crisis still in fifth inning

September 8, 2010: 3:10 PM ET

Bank profits seem to be picking up, but it may be years before investors will reap the rewards.

So say the two big rating agencies, Moody's and S&P. They issued reports Wednesday that were similarly skeptical of U.S. banks' prospects over the next few years, given the weak economy and the unsettled regulatory picture.

Not the only problem

The agencies differed mostly in their view of the scale of the toxic asset cleanup ahead. Moody's said the banks have dealt with two-thirds of their losses, while S&P believes the healing process is barely halfway done.

Moody's wrote that banks are "over the river but not yet through the woods" when it comes to dealing with problem assets. It estimated they have taken $476 billion of losses since the crisis started in 2008, leaving them about two-thirds of the way through their bubble trouble.

That's the good news, such as it is.

"Although sizeable, the remaining losses are beginning to look manageable in relation to these banks' loan loss allowances and tangible common equity," Moody's Senior Vice President Craig Emrick said. He put the remaining tab at $268 billion.

Even so, the agency gives the industry a negative outlook and warns that "a worsening of the global economy in 2010 would significantly strain U.S. bank fundamental credit quality and ratings absent mitigating actions to bolster capital."

The S&P report is even more sobering, contending that banks are barely past the halfway point in recognizing crisis-related losses. It estimates that the banks have recognized $435 billion in losses, which leaves them $365 billion away from pay dirt.

What's more, recent profit gains may prove illusory, S&P analyst Rodrigo Quintanilla warned, noting that banks are reducing their loan loss reserves at a time when it's not at all clear they won't have to be restored if economic conditions weaken.

"U.S. banks' quarterly profitability in second-quarter 2010 reached its highest level since first-quarter 2008," he wrote. "However, because most of this improvement related to credit reserve releases (loan-loss provisions not matching net charge-offs), in Standard & Poor's Ratings Services' view the quality of earnings was not high."

What may soon again be high is the layoff count, contends a third report, by banks analyst Meredith Whitney. She writes that Wall Street is on the verge of another downsizing, its second of the current cycle, as banks adjust to weakening profits in fixed income markets.

"We expect layoffs of between 40,000 to 80,000, or 5-10% of current levels, for U.S. Securities/Investments workers," Whitney writes.

And while firms that have good emerging markets businesses will be less apt to swing the ax, "U.S. and Europe-centric firms will have more painful restructuring and downsizing."

With all the good cheer out there, it's no surprise that the JPMorgans (JPM) and Bank of Americas (BAC) of the world find themselves near their 52-week lows.

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About This Author
Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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