S&P Downgrades 18 Banks

Standard & Poor's Ratings Services has downgraded some of the largest banks in view of the Obama Administration's regulatory revamp plan, which will result in tighter regulation and lower profits for the industry.

Among the banks which were downgraded were Wells Fargo (WFC - Analyst Report), U.S. Bancorp (USB - Analyst Report), BB&T (BBT - Analyst Report), Fifth Third Bancorp (FITB - Analyst Report) and KeyCorp (KEY - Analyst Report).

Yesterday President Obama unveiled his comprehensive regulatory revamp plan, which proposes to designate the Federal Reserve as the consolidated supervisor of large, systemically important institutions and also to require higher capital standards and greater oversight for all banks.

S&P also downgraded five smaller banks to junk status and still has negative outlooks on many U.S. banks, suggesting ratings could be downgraded further. The rating agency said that loan losses in the overall banking industry could increase beyond current expectations.

While the bigger banks, especially "too big to fail" ones, have benefited a lot from the various programs launched by the Federal Reserve, the Treasury and the FDIC, and are now in a much better shape, many smaller banks are still in a very weak financial state, and the FDIC's list of problem banks continues to grow.

The banks are now facing rapidly rising losses in the Commercial Real Estate
loans portfolio and Credit Cards portfolios, while the housing losses continue. Higher provisions and increased regulatory costs will eat into earnings in the coming quarters.