Just when we thought the worst was over. The second wave is right around the corner.

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Click on the bank links to see their press releases about repurchasing warrants issued to the U.S. Treasury:

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When any credit-rating service downgrades a company from ‘BBB’ to ‘BB” – which occurred with these five banks – this reclassifies its debt from investment grade to “junk” status. According to S&P’s definition of ‘BB’, any adverse business, financial or economic conditions could lead to the bank’s inadequate capacity to meet its financial commitments.

Conducting business with any bank that has been cut to “junk” status, means being safety-conscious and paying attention to the bank’s performance. As a depositor, cash accounts at all FDIC-insured institutions are guaranteed up to $250,000. To learn about the protection on your bank accounts, visit the FDIC.gov.

Additionally, if you are looking for objective appraisals about your bank or would like to explore your options, you can visit Bankrate. Their Safe & Sound ratings provide trustworthy and free ratings for businesses and consumers. Bankrate does advise “to evaluate independently all financial institutions, consider other information — including the strength of the financial institution’s management — and to contact financial institutions individually to seek answers to their questions.”

For the exception of Whitney Bank, all of these banks sustained net losses in 2008 compared with 2007. Click on the bank link for stock performance.

Technorati Tags: "Junk" Status, Credit-rating services, FDIC-Insured Banks, Regional Banks, S&P downgrades

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S&P said that its rating modifications reflect “our 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.”

By way of contrast, Moody’s did not release any bank credit ratings alongside S&P. In fact, Moody’s does not expect to downgrade ratings for any of the BHCs that made TARP fund repayments. Should the economic picture change, Moody’s may cut their ratings.

Also on June 17, the Obama administration proposed an overhaul of financial regulation. For the credit-rating establishment, the administration is only proposing modest changes. Considering that credit-raters at S&P, Moody’s and Fitch gave out high ratings on many subprime securities during the real estate boom, it is unclear why there is no proposal to overhaul the credit-rating industry. To the outrage of detractors, the credit rating establishment will continue to be compensated by investment banks selling the securities. So much for managing conflicts of interest and rating independence.

For stock performance, click on the bank’s link:

Rating Definitions:

AAA: Extremely strong capacity to meet its financial commitments.

AA: Very strong capacity to meet its financial commitments.

A: Strong capacity to meet its financial commitments

BBB: Adequate capacity to meet its financial commitments.

BB, B, CCC, and CC: regarded as having significant speculative

characteristics

BB: Adverse business, financial, or economic conditions could

lead to the bank’s inadequate capacity to meet its financial commitments.

B: Adverse business, financial, or economic conditions will likely impair

the bank’s capacity or willingness to meet its financial commitments.

CCC: Currently vulnerable, and is dependent upon favorable business,

financial, and economic conditions to meet its financial commitments.

CC: Highly vulnerable to meet its financial commitments.

R: Under regulatory supervision owing to its financial condition.

Related posts:

1. Bankroll: Credit Rating Agencies

Standard & Poor’s (S&P) is a financial services company that rates stocks and corporate and municipal bonds according to risk profiles. It’s parent company is McGraw-Hill, a publishing company.

Moody’s Investors Service is an independent, unaffiliated research company that assigns ratings on the basis of risk and the borrower’s ability to make interest payments. Moody’s backs its ratings with exhaustive financial research and unbiased commentary and analysis.

Both of these rating services have dedicated followers. There are, of course, smaller credit-rating services with modest staff that are dwarfed by Moody’s and S&P. The ratings are generally released during industry cycle changes and not at specified intervals like quarterly and annual reports.

However, any discussion of these services would not be complete without reference to a 10-month review conducted by the Securities and Exchange Commission (SEC). The review, “Summary Report of Issues Identified in the Commission Staff’s Examinations of Select Credit Rating Agencies,” was released in July 2008.

The SEC report found that some analysts at Moody’s, S&P and Fitch Ratings gave unjustified high ratings to mortgage and related securities. These phoney “high” ratings turned out to be much riskier and lower than their ratings would have actually implied. In many cases, credit raters were paid by investment banks selling the securities. This in turn prompted the SEC review to question improperly managed conflicts of interest and their rating independence.

The SEC report concluded by saying that “Each credit rating agency was cooperative in the course of these examinations and has committed to taking remedial measures to address the issues identified.”

Having said this, you will often see media references to S&P or Moody’s. For an understanding of the ratings, listed below are the rating profiles and definitions for each service.

S&P – Long-Term Rating Definitions

AAA: Extremely strong capacity to meet its financial commitments.

AA: Very strong capacity to meet its financial commitments.

A: Strong capacity to meet its financial commitments

BBB: Adequate capacity to meet its financial commitments.

BB, B, CCC, and CC: regarded as having significant speculative

characteristics

BB: Adverse business, financial, or economic conditions could lead to the bank’s inadequate capacity to meet its financial commitments.

B: Adverse business, financial, or economic conditions will likely impair the bank’s capacity or willingness to meet its financial commitments.

CCC: Currently vulnerable, and is dependent upon favorable business, financial, and economic conditions to meet its financial commitments.

CC: Highly vulnerable to meet its financial commitments.

R: Under regulatory supervision owing to its financial condition.

Moody’s Long-Term Rating Definitions

Aaa: Highest quality, with minimal credit risk.

Aa: High quality and are subject to very low credit risk.

A: Upper-medium grade and are subject to low credit risk.

Baa: Moderate credit risk and may possess certain speculative characteristics.

Ba: With speculative elements and are subject to substantial credit risk.

B: Speculative and are subject to high credit risk.

Caa: Poor standing and are subject to very high credit risk.

Ca: Highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.

C: Lowest rated class and are typically in default, with little prospect for recovery of principal or interest.

Note: Moody’s adds numerical modifiers 1, 2, and 3 to each rating classification from Aa through Caa.

Modifier 1: higher end of its generic rating category.

Modifier 2: mid-range ranking.

Modifier 3: lower end of that generic rating category.

When S&P and Moody’s release ratings for the bank holding companies that underwent stress testing, they will be posted under “Bankroll.”

Related posts:

1. Standard & Poor’s Bank Credit Ratings — June 17, 2009

Six out of 10 banks posted net losses or reductions in total net income for the first quarter 2009 compared with 2008:

Fifth Third Bancorp, Cincinatti, OH: $50 million net income

Fortune 500 Rank: 307

Profile: Banking, investment advising and other services for individual consumers, corporations and not-for-profit organizations. Fifth Third is one of the largest money managers in the Midwest.

“From the beginning of this current credit cycle, we have been aggressively dealing with our most problematic loan portfolios,” said Kevin T. Kabat, Chairman, President and CEO of Fifth Third Bancorp. Mr. Kabat stated, “During the fourth quarter of 2008, we took actions to further reduce the risk in these portfolios, primarily residential home builder and commercial non-owner occupied real estate loans in Michigan and Florida.” Due to increasing loan-loss reserves, Fifth Third’s first-quarter profits fell 19 percent. To cover future bad loans, it has set aside $544 million — a fivefold increase from a year ago.

GMAC Financial Services, Detroit, MI: $675 million net loss

Fortune 500 Rank: 78

Profile: Automotive finance, mortgage operations, insurance, commercial finance and online banking with operations in North America, South America, Europe and Asia-Pacific.

GMAC announced that “Results in the quarter were primarily attributable to continued pressure in mortgage operations related to valuation adjustments on mortgage servicing assets, weaker credit performance on both auto and mortgage assets, mark-to-market adjustments on derivatives, and an original issue discount related to the fourth quarter debt exchange.”

KeyCorp, Cleveland, OH: $488 million net loss

Fortune 500 Rank: 321

Profile: Banking, commercial leasing, investment management, and other products and services for individual consumers, corporate and institutional clients. KeyCorp’s 14-state network operates in the Northwest, Rocky Mountain, Great Lakes and Northeast regions.

Chief Executive Officer Henry L. Meyer III stated that “Our results reflect an extremely challenging operating environment and the expedient steps we continue to take to identify problem loans and to build Key’s loan loss reserves.” Specifically, the loss for the current quarter was primarily the result of taking an $875 million provision for loan losses, which exceeded net charge-offs by $383 million.

Morgan Stanley, New York, NY: $177 million net loss

Fortune 500 Rank: Not a public company

Profile: Investment banking, securities, investment management and wealth management services for corporations, governments, institutions and high net worth individuals. Morgan Stanley has more than 600 offices in 36 countries.

John J. Mack, Chairman and CEO, said, “Morgan Stanley would have been profitable this quarter if not for the dramatic improvement in our credit spreads – which is a significant positive development, but had a near-term negative impact on our revenues.” The firm realized net losses of $1 billion on real estate investments and a $1.5 billion drop in net revenue related to the tightening of credit spreads on some of its long-term debt. In September 2008, Morgan Stanley converted from an investment bank to a bank holding company. This allowed the firm to gain access to emergency TARP funds.

Regions Financial, Birmingham, AL: $77 million net income

Fortune 500 Rank: 245

Profile: Banking, trust, securities brokerage, mortgage and insurance products and services for individual consumers, businesses and corporations. Regions operates in 16 states across the South, Midwest and Texas.

“We are very encouraged by the strong performance of our core business, particularly our continued growth in households and customer deposits,” said Dowd Ritter, chairman, president and chief executive officer. However, Regions also said that its most stressed portfolios continue to be residential home builders, home equity second liens in Florida, and condominiums. Those stressed assets currently amount to $8.7 billion, or about 9 percent of the total loan portfolio.

SunTrust Banks, Atlanta, GA: $815 million net loss

Fortune 500 Rank: 193

Profile: Banking, credit, trust, and investment services for individual consumers, businesses and institutional clients. SunTrust operates 1,694 retail branches in the Mid-Atlantic and Southern regions.

James M. Wells III, SunTrust Chairman and Chief Executive Officer said “SunTrust, like other financial institutions, is still working through credit and earnings challenges as the weak economy continues to take a toll on performance.” The first quarter loss was entirely driven by the $715 million goodwill charge and increased reserves for loan losses. Specifically, this was largely due to a write-off on the sagging value of mortgage and real estate loans.

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June 17 was the first day that these banks were eligible to start repayments. By the end of the day, all 10 banks had repaid their TARP funds. To exit this government bailout completely, they must also repurchase the Treasury’s warrants to buy back their stock. Although these BHCs have notified the Treasury about their intentions, none of these banks have repurchased their warrants.

Click on the bank links to see their press releases about TARP fund repayments to the U.S. Treasury:

The remaining recipients of TARP funding that failed the stress test and haven’t won approval to repay the government are: Bank of America, Citigroup, Fifth Third Bancorp, GMAC, KeyCorp, PNC Financial Services, Regions Financial, SunTrust Banks and Wells Fargo. These BHCs have until November 9, 2009 to implement their capital plan that was submitted to the U.S. Treasury on June 8, 2009.

Related posts:

1. TARP Funds – Purpose
2. TARP Funds as of May 27, 2009
3. Treasury Allows 10 BHCs to Repay their TARP Funds

Stay tuned for upcoming posts.

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The survey of these 21 banks found a slight decline in outstanding loan balances for first lien mortgages, home equity lines of credit, credit card loans, and other consumer loans. Within the context of our declining global economy, consumers are now focused on reducing debt which is driving down the outstanding loan balances held by these major banks. Consistent with this, usage of credit cards and home equity lines of credit were flat in April. Of the 21 banks surveyed, there was also a modest decline in new loan applications.

As for businesses, the demand for commercial and industrial (C&I) loans was well below normal levels. As companies continue to downsize and cut costs, so does the demand for such loans. Banks project that the lower demand for C&I loans will persist through the second quarter of 2009.

Within commercial real estate (CRE), the April survey results indicated continuing poor market conditions and general caution by businesses. Loan balances were flat and the surveyed banks reported that the demand for commercial real estate loans remained well below normal levels.

Once the U.S. Treasury releases the May survey next month, the results will be posted.

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Since the announcement, the media has made various assumptions about the actual payback list of banks. However, the Treasury’s press release did not list any of the 10 banks. Once the U.S. Treasury releases the names of the banks that can repay the government’s bailout funds, the specifics will be posted under “TARP Funds.”

Related posts:

1. TARP Funds – Purpose
2. TARP Funds as of May 27, 2009
3. U.S. Big Banks Repay TARP Funds on June 17, 2009