Profits for 2009 are likely to be weaker than the first quarter results suggest

The outlook for large global banks remains negative as credit problems will persist beyond the beginning of any economic recovery, Fitch Ratings says.

For the major global financial institutions, higher capital ratios, less off-balance sheet activity and better asset spreads are likely over the near term, according to Sharon Haas, managing director in Fitch’s North American Financial Institutions group. Profits for 2009 are likely to be weaker than the first quarter results suggest, with provisions to remain elevated, it noted.

Fitch also expects more U.S. bank failures this year, likely among smaller and possibly mid-tier regional banks. However, failures are not expected to reach 1989’s level, when more than 500 banks failed, it said. There have already been 36 bank failures in 2009, compared to 25 in all of 2008, the rating agency said.

In Europe, Fitch anticipates that governments will renew funding and liquidity facilities where necessary until a normal operating environment returns. “We anticipate that European government funding will slowly reduce over the coming months as confidence gradually returns to the market,” says Gerry Rawcliffe, managing director in Fitch’s European Financial Institutions team. “However, it is likely that systemically important, lower risk banks will return more quickly at better pricing levels.”

In the long run, Fitch expects governments to divest their holdings in financial institutions. It expects a combination of corporate divestitures and gradual recovery of fundamentals will occur over the next several years, ultimately paving the way to redeem government ownership.

IE