WORLD PROPERTY CHANNEL ®

Moody's Investors Service sees another year of red ink of the profit-and-loss statements of many U.S.  banks.

The New York City-based bond ratings agency gives the banking industry a negative outlook for 2010 in its quarterly report.

Moody's says banks' asset quality issues are "past the peak" but charge-offs and non-performers continue to eat away at profitability and sheer fundamentals.

Based on Moody's market data, banks' non-performing loans stood at 5.0 percent of total loan assets at March 31, 2010.

DSNews.com reports Moody's says U.S. rated banks have already charged off or written-down $436 billion of loans in 2008, 2009, and the first quarter of 2010.

That leaves another $307 billion to reach the rating agency's full estimate of $744 billion of loan charge-offs from 2008 through 2011.

In aggregate, the banks have recognized 60 percent of Moody's estimated total charge-offs and 65 percent of estimated residential mortgage losses, but only 45 percent of projected commercial real estate losses.

In the first quarter of this year, the banking industry's collective annualized net charge-offs came to 3.3 percent of loans, versus 3.6 percent of loans in the fourth quarter of 2009, Moody's said.

Despite two consecutive quarters of improvement in charge-offs, the ratings agency notes that the figures still remain near historic highs, dating back to the Great Depression, DSNews.com reports.

According to Moody's analysts, the decline in aggregate charge-offs was driven by commercial real estate improvement, which "we believe is likely to reverse in coming quarters," they said in the report.

A similar commercial real estate decline was experienced in the first quarter of 2009 before charge-offs accelerated through the rest of the year.

"The return to 'normal' levels of asset quality will be slow and uneven over the next 12 to 18 months," said Moody's senior vice president Craig Emrick.

But Emrick added that "although remaining losses are sizable, they are beginning to look manageable in relation to bank's loan loss allowances and tangible common equity," DSNews.com reports.

U.S. banks' allowances for loan losses stood at $221 billion as of March 31, 2010, which is equal to 4.1 percent of loans, Moody's reported.

Although this can be used to offset a sizable portion of remaining charge-offs, banks will still require substantial provisions in 2010, the agency said.

Moody's says its negative outlook for the U.S. banking system is driven by asset quality concerns and effects on profitability and capital.

The agency's ratings outlook is also influenced by the potential for a worse-than-expected macroeconomic environment, Moody's said.

"More severe macroeconomic developments, the probability of which we place at 10 percent to 20 percent, would significantly strain U.S. bank fundamental credit quality," Moody's analysts wrote in their report.

---