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The U.S. banking sector now has reasons to rejoice with Standard & Poor's Ratings Services’ revision of the outlooks on 4 regional U.S. banks – BancorpSouth, Inc. (BXS - Analyst Report), Huntington Bancshares Inc. (HBAN - Analyst Report), Regions Financial Corp. (RF - Analyst Report), and Susquehanna Bancshares, Inc. (SUSQ - Snapshot Report) – to positive from stable.

Additionally, the rating agency upgraded Zions Bancorp. (ZION - Analyst Report) and Citigroup Inc.'s (C - Analyst Report) operating subsidiaries to stable from negative. The agency has also affirmed the ratings on these banks.

Reasons for the Upgrade

The rating agency considers economic risks in the U.S. to have considerably subsided based on the recovery of the housing sector. This has resulted in a sizeable reduction in credit losses and improvement in credit quality across all loan categories for about the past 3 years. Standard & Poor's anticipates that credit losses are likely to decline to $58–$60 billion level in 2013 and further to $55–$58 billion level in 2014.

With the possibility increased domestic credit provided to the private and housing sector, the rating agency believes that the economic recovery in the U.S. will get an added impetus.

Besides these factors, the outlook revision for Citigroup's operating subsidiaries reflects the bank's sustained progress in reducing problem assets from the Citi Holdings unit. For Zions, the revision indicates an ease of the previous concerns related to the company's exposure to commercial real estate loans and unrealized losses from the securities portfolio. Zions’ capital position is also poised to benefit from lower economic risks in the U.S. banking sector.

Moreover, the outlook revisions consider other company-specific factors, including a possible improvement in asset quality, profitability and business stability as compared to rival companies.

Our Viewpoint

However, there is a lingering question as to whether the economy has returned to its pre-crisis state. We believe that though the rating upgrade reflects a favorable equity and asset market backdrop, together with decreasing unemployment, a progressive housing sector and a flexible monetary policy, the banking sector still has a long way to go.

U.S. banks started 2013 with aggressive expense control, a sound balance sheet, an uptick in mortgage activity and lesser credit loss provisions in the first quarter.

Moreover, U.S. banks are actively responding to legal and regulatory pressures, thereby proving their competence in bracing challenges. Overall, structural changes in the sector will continue to impair business expansion. However, entering the new capital regime will ensure long-term stability and security for the industry.

Though the improving performance by the banks seems already priced in and there remain significant concerns, the sector's performance in the upcoming quarters is not likely to disappoint investors.

Notably, the revision in outlook of the banks by S&P is a significant movement towards growth.

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