S&P Expects Turbulent 2008 for Banks

NEW YORK - Continued economic pressure will cut into profit margins at banks and other specialty financial services firms in 2008, according to two new reports released by Standard & Poor's on Tuesday.

Although not forecasting a recession, S&P expects U.S. economic growth to slow in 2008, as the housing sector remains weak throughout the year and consumer spending wanes.

Illiquidity of credit markets, rising non-performing assets and the general deterioration of credit quality are likely to be the biggest drivers of reduced earnings performance in 2008 for financial firms.

An increase in non-performing assets and charge-offs is likely to grow for the next two to three years, similar to the duration of past downturns in the credit cycle. Non-performing assets could spike among housing-related loans, such as mortgages, home equity lines of credit and residential construction loans, according to the reports.

S&P anticipates there will be a disparity among banks, though, as to which see the worst rise in non-performing assets due to loan mix, underwriting standards and credit risk management.

Financial services firms with access to committed bank funding, such as deposits, and those with limited near-term maturities on unsecured debt will be in the best position to handle the downturn as the credit markets will remain tight.

Credit markets are used by financial services firms to access capital to operate or provide more loans to customers. Debt can be issued to investors in the secondary markets either backed by assets, such as mortgages or credit card loans, or be unsecured.

As subprime mortgages _ loans given to customers with poor credit history _ became increasingly delinquent and fell into default earlier this year, investors stopped purchasing risky debt, such as securities backed by subprime mortgages. The freeze in those markets spilled over to other types of debt as well, making it more difficult for banks and other financial services firms to access cash to continue operations. It also led to firms writing down the value of securities they held in portfolios.

Overall, S&P estimates U.S. banks will retain stable outlooks in 2008, but negative ratings actions will likely outpace positive ones given the weaker economic and credit environments.

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