Another collapse in home prices would hinder bank earnings: S&P

Another downturn in home prices could stifle the solid recovery banks have made in the past two years, cutting into profit margins, derailing credit and threatening ratings, according to Standard & Poor's credit analyst Devi Aurora.

The S&P report, which is based on a hypothetical situation with home price declines as deep as 15% between now and December 2012, examines the impact further price declines would have on banks, which are exposed to fluctuating home prices through loan portfolios and holdings of mortgage-backed securities.

In the past 12 months, banks have performed quite well.  Recent reports show earnings at banks insured by the Federal Deposit Insurance Corp. growing exponentially year-over-year.

The banking regulator said financial institutions earned $29 billion in the first three months of 2011, up 66.5% from $17.4 billion a year ago and at the highest level in four years.

When analyzing the potential for further price volatility, S&P analysts found "rising interest rates, combined with receding business and consumer confidence, could be the trigger for a renewed housing downdraft."

Write to Kerri Panchuk.