S&P Downgrades Wells Fargo, U.S. Bancorp, Other Banks

The ratings agency lowered its ratings and revised its outlooks on 22 banks, as stress tests signal the potential for more pain ahead

From Standard & Poor's RatingsDirect

Standard & Poor's Ratings Services lowered its ratings and revised its outlooks on 22 rated U.S. banks on June 17. The actions reflect S&P Ratings' belief that operating conditions for the industry will become less favorable than they were in the past, characterized by greater volatility in financial markets during credit cycles, and tighter regulatory supervision.

The changes also reflect S&P Ratings' ongoing broad-ranging reassessment of industry risk for U.S. financial institutions.

S&P Ratings' overall assessment of the U.S. banking industry incorporates the following key points:

•The industry is now in a transition and will likely undergo material structural changes;

•The loss content of loan portfolios should increase, but recent capital rebuilding should help banks defray these losses;

• Stress tests point to more pain in the future;

•S&P Ratings doesn't view regional banks as being highly systemically important; and

•Potential losses could increase beyond S&P Ratings' current expectations.

"We believe the banking industry is undergoing a structural transformation that may include radical changes with permanent repercussions," says S&P credit analyst Rodrigo Quintanilla. "Financial institutions are now shedding balance-sheet risk and altering funding profiles and strategies for the marketplace's new reality. Such a transition period justifies lower ratings as industry players implement changes." Possible changes include increased regulatory oversight and lower profitability.

In addition, S&P Ratings reassessed the relative creditworthiness of many institutions based on their abilities to deal with the increased risks during this transition period.

"We believe some firms may be better able to weather the risks ahead than others," Quintanilla adds. "In the long term, we could foresee ourselves raising ratings if lower earnings and reduced risk are accompanied by stronger risk-adjusted capital and effective governance."

As a result of the most recent downgrades, as well as those since mid-2007, the counterparty ratings on U.S. banks (at the operating subsidiary level) have fallen by an average of two notches, to BBB+ today from A before the crisis began in June 2007.

However, says Quintanilla, "the high number of firms with negative outlooks suggests that the ratings could still decline if the credit cycle is longer and/or deeper."

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