BY: CARRIE BAY
Moody’s Investors Service said this week that U.S. banks have already written off nearly two-thirds of the real estate loans expected to go sour through 2011.
The credit ratings agency projects banks will incur $744 billion of loan charge-offs between 2008 and 2011. Moody’s analysts say an estimated $476 billion of these losses have already been recognized, leaving $268 billion, or 36 percent, remaining.
On an asset class basis, Moody’s estimates 68 percent of residential mortgage losses have been accounted for versus 49 percent of bad commercial real estate loans.
Moody’s says total loan charge-offs have decreased on an aggregate basis for three consecutive quarters and amounted to just 3 percent of bank’s loan holdings in the second quarter of this year – the lowest level since the beginning of 2009, but still near historic highs.
All major categories showed improvement in charge-offs during the second quarter of 2010 with the exception of commercial real estate, which increased modestly.
By Moody’s estimates, total nonperforming loans were approximately 4.7 percent of loans at June 30, 2010, the lowest level since the Q2 of 2009.
As of the end of June, U.S. banks’ loan loss allowance stood at $213 billion, or 4.0 percent of loans.
In its latest quarterly report on the fundamental credit conditions of the U.S. banking system, Moody’s said that although U.S. rated bank asset quality continues to improve, the credit outlook for the U.S. banking industry continues to be negative.
“It is clear to us that bank asset quality issues are past the peak,” said Moody’s SVP Craig Emrick. “However, charge-offs and nonperformers remain near historic highs.”
Emrick added that although sizeable, the remaining $268 billion in loan losses the company expects to come through over the next year “are beginning to look manageable in relation to these banks’ loan loss allowances and tangible common equity.”
Moody’s says it expects the return to normal levels of credit conditions to be “slow and uneven” through the next 12 to 18 months. However, a worsening of the global economy in 2010 would significantly strain U.S. bank fundamental credit quality, according to the agency and worsen the sector’s overall outlook.