U.S. Banking Outlook Still Negative

?Despite posting posted $34.5 billion in second quarter profits, the Moody’s outlook for U.S. banks is currently negative due to multiple economic uncertainties.

The credit rating agency Moody’s just released its latest report on the U.S. banking industry and it appears to be negative due to the multiple ongoing problems of low interest rates, high unemployment, weak economic growth, and uncertainty over U.S. fiscal policy. Even after U.S. banks posted $34.5 billion in second quarter profits, Moody’s says that things could still go bad for the banks if the economy experiences another big stumble. According to the report from Moody’s, U.S. banks remain in a recovery mode that is prone to reversal if the economy takes a turn for the worse. Nonperforming asset levels are still high, and issues from the financial crisis may take years to fully resolve.

The negative outlook from Moody’s follows recent data from the FDIC that showed U.S. banks taking in a net positive income of $34.5 billion in the second quarter of 2012. That figure is up nearly $5.9 billion from the second quarter of 2011, and reflects profit levels similar to what the banks posted back in 2007. The Moody’s outlook included the observation that “system-wide costs remain stubbornly high because banks need to manage high levels of problem assets, invest in their businesses, and absorb higher regulatory expenses. These burdens are occurring amid tepid loan growth and in a low interest rate environment that contributes to net interest margin contraction. Meanwhile, capital markets revenue is depressed for the third consecutive year.”  However, economists note that a bank’s profits are actually just loan loss provisions to cover loans that go bad and when the banks feel they need less of that money set aside they can release funds which will temporarily boost their profits. This is borne out by the fact that in the second quarter of 2012 U.S. banks set aside over $14 billion to cover potential loan losses compared to setting aside just $9.2 billion during the first quarter of 2007.

Despite the current negative outlook, Moody’s expects U.S. banks will be profitable over the next 12 to 18 months thanks in part to an improved ability to handle risks due to larger capital and liquidity buffers. The Moody’s report also concluded that if not for the economic uncertainties of persistent low interest rates, a weak housing market, mortgage repurchase costs and increasing regulation, “A stable outlook on the recovering U.S. banking system would be reasonable given the improved financial profile of most banks. However, the clear threats to the economy are such that we continue to maintain a negative outlook on the system.”