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Banks weighed down by weak lending, tighter regulations

Major banks are grappling with a plethora of regulatory and capital raise issues, prompting Standard & Poor's to release a report saying big bank and trust revenues remain soft overall.  

Banks saw weaker earnings in the fourth quarter as the institutions continued to deal with slow lending, fewer channels for fee revenue, insecurity over the European debt crisis and lower credit provisioning. They are also seeing new regulations and a need to gain capital in a sluggish lending environment, the S&P noted.

"Our outlook remains negative for the majority of large banks and trust banks," S&P analysts wrote in a report. "We are encouraged by the banks increasing capital and improved credit fundamentals. But we will continue to evaluate the effects that housing market weakness, regulations from new legislation, higher representation-and-warranty costs, low interest rates and litigation concerns could have on the industry."

Delays continue as well in the foreclosure process, which keeps bad loans on the books for longer periods of time, impacting revenue and earnings.

However, S&P said "the recent mortgage servicer settlement could help loosen some of the blockage in the foreclosure process we've seen in some states." Still, the settlement is unlikely to impact bank ratings, S&P analysts noted.

Banks, at the moment, are pushing forward with more short sales and deed-in-lieu transactions to cut back on the firms losses, S&P reported.  

The risk of a European recession continues to haunt banks, prompting S&P to consider such a scenario.

"A shock to the system could also hurt U.S. institutions because of a rise in the probability of a global recession. In addition, if the pace of distressed asset sales increased, it would likely hurt global asset values," S&P said. "Ultimately, if these events occur, we believe they would pressure large U.S. banks' creditworthiness. However, although we consider these risks in our analysis, our ratings on those entities currently don't incorporate a high probability of a global recession or system shock."

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