Bank Outlook to Stable by Moody’s 5 Years After Cut

Moody’s Investors Service changed its outlook for the U.S. banking system to stable after keeping it negative since 2008, saying the country’s economy poses less of a threat.

Gross domestic product will grow by 1.5 percent to 2.5 percent through next year, helping lenders avoid losses, the New York-based credit-rating company said today in a report. Banks have raised capital to protect against potential deterioration in the economy, while low interest rates have buoyed the values of their real-estate portfolios, Moody’s said.

Moody’s is becoming more optimistic about U.S. lenders a year after it downgraded 15 banks in a review of the global financial system. The change didn’t affect its negative outlooks for Bank of America Corp. and Citigroup Inc., both of which are rated Baa2, two levels above junk.

“The downside risk of the U.S. economy and Europe is less than what it was a year ago, which reinforces the improvement in the banks’ balance sheets,” Sean Jones, a Moody’s analyst, said in a phone interview.

The median rating for U.S. banks, which was A1 in June 2007 before the financial crisis, has slipped to A3, Moody’s said. The outlook for the U.S. banking system refers to its expectations of changes in creditworthiness over the next 12 to 18 months.

Low Rates

Banks are struggling to boost profitability with interest rates near zero, Moody’s said. That may lead the companies to make riskier loans in order to increase net income, according to the credit-rating company. It also raises the value of debts banks already own, it said.

“Protracted low rates are negative for profitability but they do help with the asset quality,” Allen Tischler, a Moody’s analyst, said in an interview. “It does cut both ways.”

Bond performance shows that investors also view U.S. lenders as more creditworthy. Bank bonds have returned 16.7 percent since the end of 2011, beating the 11 percent gain for all U.S. investment-grade bonds, according to Bank of America Merrill Lynch index data.

Moody’s outlook for the biggest U.S. banks, which benefit from potential government bailouts, is negative because regulators are developing a plan for orderly liquidations that may make future taxpayer-funded rescues less likely, Jones said. Moody’s said it will decide whether to downgrade the banks or raise the outlooks to stable by year-end.

Before it's here, it's on the Bloomberg Terminal.