Standard & Poor's on Monday said the chance of rating downgrades to large U.S. banks has increased over the past two weeks and their current high ratings have little cushion for volatile earnings.
"If this credit cycle becomes more extreme than prior cycles, which promises to be the case for the mortgage sectors, we could lower ratings for at least some of these institutions," S&P said in a statement.
S&P said the likelihood of downgrades has grown since it placed Citigroup's ratings on review for downgrade on April 18 and changed Wachovia outlook to negative from stable on April 14. A negative outlook indicates there is greater chance of a downgrade over the next two years.
"First quarter 2008 was the third in a row with poor results for most of the large complex U.S. banks," S&P said.
Though banks have already posted large write-downs for their mortgage-backed securities and leveraged loans, growing charge-offs for loans and the need to build reserves should severely depress banks' earnings into 2009, the rating agency said.