In a report published Friday, Fitch Ratings states that the 2009 rating outlook for U.S. financial institutions remains negative but that downgrades are not expected to be as numerous or drastic as in 2008.

Rating actions taken in 2008 incorporated expectations of high loan loss provisions and weak profitability through mid-2009. Fitch says that government intervention has likely reduced the risks of multi-notch downgrades for the largest financial firms. Consolidation is also expected to increase particularly across regional banks, it adds.

“Key financial metrics will remain significantly weak for 2009 due to an expected bleak operating environment. Profitability and credit quality metrics are expected to exhibit high degrees of stress. Recent consolidation and government intervention result in a higher concentration of banking assets in fewer institutions,” it says.

For 2009, a majority of ratings changes will occur in largely regional institutions which face greater loan concentrations, Fitch suggests. Nonperforming and reserve levels will vary materially across U.S. banks due to wide variances in unemployment and housing price depreciation, it notes.

Unemployment will be a major driver of credit quality for consumer and corporate lending, it says. Much of the recent increase in provisions by U.S. financial institutions are being driven by the expected increase in consumer loss rates in both unsecured credit and mortgages, it says. Fitch expects provisions to peak in the second quarter of 2009 as unemployment rises, but that it will drop back in the latter half of 2009.

A return to a Stable Rating Outlook is possible looking toward the end of 2009, the credit rating agency suggests. “For this prospect to become a reality, some semblance of investor and counterparty willingness to conduct normal activity must emerge, current government economic incentives must gain significant traction, and economic reality cannot exceed forecasts significantly on the downside in magnitude or duration. Admittedly, these conditions provide a big ‘if’, but Fitch’s willingness to put forth the potential turn in bank fortunes recognizes that there is a reasonable chance of increased stability becoming reality,” it concludes.

IE