U.S. banks will continue to face a tough market environment and be pressured by rising credit costs, Fitch Ratings says.

The rating agency notes that it does not expect negative credit trends to reverse themselves in the near to intermediate term, “particularly because of increasing concerns regarding exposure to commercial real estate losses”. Additionally, it says that banks’ earnings capacity and their ability to absorb higher credit costs is being eroded by narrowing margins, causing declines in spread income.

Fitch says that it is “highly concerned” with the prospect of significant deterioration in commercial real estate, which it believes will likely be a bigger contributor to credit problems in 2009-2010. As a result, it is undertaking an expanded review of U.S. bank commercial real estate exposures.

In a separate report, Fitch reports that corporate credit quality continued to deteriorate in the first half of 2009. The rating agency says that rating activity among global financial institutions remained negative throughout the first half. While, among industrials, the ratio of downgrades to upgrades improved from 9.5 to 1 in the first quarter to 4.6 to 1 in the second quarter. North American and European credits experienced the sharpest downgrade rates in the first half of the year, 26% and 27%, respectively, it said.

“While recent economic data has been encouraging, pressure on corporate credit quality from the still uncertain global economic environment remains a deep concern,” said Mariarosa Verde, managing director of Fitch Credit Market Research.

IE