Improving economic conditions in the U.S. proved to be a
redeeming factor for the U.S. banks as Moody's Investors Service,
a rating arm of
), upgraded its outlook to 'stable' from 'negative' on the U.S.
banking system. This rating upgrade came after a long span of 5
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The rating agency's move on the rating outlook for banks came on
the back of continual progress in the operating environment and
reduction in downside risks to the banks. The U.S. banking sector
had been assigned a negative outlook by Moody's since the latest
Moody's expects creditworthiness of the U.S banks to evolve over
the next 12 - 18 months. Though improved economic data such as
higher consumer spending and gross domestic product (GDP),
improving housing market and declining unemployment rate point
toward optimism, a paltry interest-rate environment is
Low rates provoked lenient loan underwriting standards at banks
in order to get higher returns. Consequently, banks might invest
in riskier assets. Moreover, these actions could lead to elevated
credit costs, thereby reducing pre-provision earnings in the
upcoming years. Therefore, Moody's might downgrade the rating
outlook, following a prolonged slack in underwriting standards.
On the contrary, Moody's believes that the low interest rates are
stimulating private-sector employment growth, which more than
offset government job losses. Moreover, the banks' asset quality
metrics have been improving driven by the low interest rates,
which facilitated the net charge-offs to return to the pre-crisis
Notably, Moody's anticipates U.S. GDP growth in the range of
1.5%-2.5% in 2013-2014 and unemployment rate to be around 7.0%.
The most recent monthly U.S. jobs report indicates the rate to be
According to Moody's, the current strong position of the banks'
balance sheets will be safeguarded in the future, backed by
persistent GDP growth and improving employment conditions.
Moreover, after another year of declining credit-related costs
and restitution of capital, U.S. banks are more proactively
positioned to face an economic meltdown.
The rating outlook upgrade is valuable for U.S. banks as they
play a major role in preserving investor confidence and help
boost the creditworthiness. Notably, U.S. banks which witnessed
price appreciation following the rating outlook upgrade include
Bank of America Corporation
JPMorgan Chase & Co.
Wells Fargo & Company
U.S. banks started 2013 with uninterrupted expense control, a
sound balance sheet, an uptick in mortgage activity and lesser
credit loss provisions in the first quarter. Moreover, a
favorable equity and asset market backdrop, falling unemployment,
a progressive housing sector and a flexible monetary policy
facilitated a smoother path to growth.
Moreover, U.S. banks are actively responding to legal and
regulatory pressures, indicating competence to encounter
impending challenges. Overall, structural changes in the sector
will continue to impair business expansion. Entering the new
capital regime will ensure long-term stability and security for
Though the improving performance by the banks seems already
priced in and there remain significant concerns, the sector's
performance in the upcoming quarters is not expected to