Moody's Ups Rating Outlook for Banks - Analyst Blog


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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 Moody's Corp. ( MCO ), upgraded its outlook to 'stable' from 'negative' on the U.S. banking system. This rating upgrade came after a long span of 5 years.

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 financial crisis.

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 disturbing.

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 levels.

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 7.5%.

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 ( BAC ), JPMorgan Chase & Co. ( JPM ), Wells Fargo & Company ( WFC ) and Citigroup Inc. ( C ).

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 the industry.

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 disappoint investors.

BANK OF AMER CP (BAC): Free Stock Analysis Report

CITIGROUP INC (C): Free Stock Analysis Report

JPMORGAN CHASE (JPM): Free Stock Analysis Report

MOODYS CORP (MCO): Free Stock Analysis Report

WELLS FARGO-NEW (WFC): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: BAC , C , GDP , JPM , MCO

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