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Odds Rise for Bank Downgrades

Citigroup, Bank of America, and Wells Fargo are among the 23 U.S. banks S&P has placed on CreditWatch Negative

From Standard & Poor's RatingsDirectOn May 4, Standard & Poor's Ratings Services placed its ratings of 22 U.S. large diversified and regional banks, and one thrift, as well as their related entities, on CreditWatch with negative implications.

The CreditWatch placements relate to an ongoing industry review we are conducting. Our analysis of industry fundamentals, with a focus on the capitalization of the identified companies in the context of our expected level of losses during the next two years, suggests that the likelihood of negative rating actions has increased. These rating actions identify companies we believe have at least a one-in-two likelihood of a one-notch or multiple-rating downgrade within 90 days. That said, we believe most rated institutions will be able to earn their way out of these credit losses during the cycle.

The actions are in line with the negative bias present in the sector since fall 2008 and follow our recently initiated portfolio review. Apart from identifying credit and earnings risks in light of our new loss expectations, we seek to determine whether loan losses can erode common equity capital during the next two years to the point that a capital infusion would become necessary to maintain current ratings.

The results of our base-case stress test—which is also our expected case—indicate widespread, though not necessarily severe, capital needs that could result in downgrades of one or several notches. In cases in which we do not detect a substantial capital deficiency, we still need to see evidence that our loss assumptions for those entities are in line with our heightened concerns about industry risk.

Indeed, as a result of such stress tests and what they reveal about the potential impact on earnings and capital, we will examine our ratings on these banks, both in absolute terms and relative to those of their respective peers. At the same time we would seek to understand any capital-raising plans the institutions might have that could help to restore lost capital. We will assess these issues in concert with all other factors that build to the final ratings.

Next, a Detailed Analysis

We intend to examine such banks in a portfolio review during the next several weeks to identify those that are most vulnerable to these credit issues. Individual banks' experience undoubtedly will vary based on their client mix, underwriting standards, and geography.

Based on preliminary results, we believe the identified companies stand to underperform peers in the face of the emerging profit-growth pressure. We will now conduct a more detailed analysis of the companies placed on CreditWatch Negative to assess whether they can withstand the potential increased losses at the current rating level and relative to their peers.

The CreditWatch resolutions will be determined on a company-specific basis. We will consider each company's financial profile, the staying power of its franchise, and the losses we expect to emanate from its loan portfolio and exposures. Because our base-case assumptions are not based on full-fledged earnings forecasts but rather on the potential for increased loan losses, we will need to assess other factors further that could affect earnings.

In the case of banks we view as systemically important, the long-term counterparty credit ratings currently reflect—to varying extents—uplift from the stand-alone credit profiles, taking account of the companies' high systemic importance and the likelihood that additional support would be extended by the U.S. government if needed. These companies have benefited from extensive extraordinary government assistance, and we see no strong signs that future government support is diminished. Yet as the stand-alone credit profile (SACP) deteriorates, the prospects for a return to a higher SACP become more remote, and the appetite of the government to provide increasing levels of support could diminish.

These placements will not necessarily result in downgrades. The circumstances that would result in a one- or more-than-one-notch rating downgrade will be specific to each situation as we analyze if future financial performance can withstand a harsher environment at the current rating. On the other hand, we will affirm our ratings on companies that outperform financially relative to their current rating level, and those whose weakening performance is deemed to be cyclical and not structural in nature.

In cases in which a downgrade is not currently warranted, but a longer-term (next two years) downgrade potential exists, we would assign a negative outlook. We expect the results of this review before June.

Banking companies placed on CreditWatch Negative — 5/4/09


S&P Counterparty Credit Rating

Associated Banc Corp. (ASBC)


BB&T Corp. (BBT)


Bank of America Corp. (BAC)


Capital One Financial Corp. (COF)


Carolina First Bank


Citigroup Inc. (C)


Citizens Republic Bancorp Inc. (CRBC)


Comerica Inc. (CMA)


Fifth Third Bancorp (FITB)


First National Bank of Omaha


Huntington Bancshares Inc. (HBAN)


KeyCorp (KEY)


M&T Bank Corp. (MTB)


PNC Financial Services Group (PNC)


Regions Financial Corp. (RF)


Susquehanna Bancshares Inc. (SUSQ)


Synovus Financial Corp. (SNV)


U.S. Bancorp (USB)


Webster Financial Corp. (WBS)


Wells Fargo & Co. (WFC)


Whitney Holding Corp. (WTNY)


Wilmington Trust Corp. (WL)


Astoria Financial Corp. (AF)


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