Fitch Offers Grim Outlook for Banks

The steady drumbeat of bad news for banks continued Thursday, as Fitch Ratings' industry analyst said she believes financial institutions will need to continue to boost loan-loss reserves and figure out how to maintain capital levels.

Sharon Haas, managing director of Fitch's financial institutions group, said banks with exposure to asset classes under considerable stress, including mortgages, home equity and even credit cards face a tough road ahead.

"There have been many downgrades on U.S. banks and there will likely be more downgrades," Haas said at Fitch's Global Banking Conference hosted in New York on Thursday morning.

Still, Haas is not expecting "massive" debt rating changes across the banking industry. Banks are still able to service their debt obligations resulting in debt ratings that are largely "still in good shape," she said.

Banks largely had gone into this latest credit cycle -- led by a decline in consumer loan portfolios -- with weaker loan reserve ratios as compared to previous cycles, because credit had been relatively benign over the past few years, and banks base their reserve ratios on historical looks back. The credit crisis, beginning last year, became an issue "very rapidly" and "significantly" more than expected, she said.

Therefore, Hass anticipates banks playing "catch-up" as they continue ramping up their loan reserves.

On average, residential first mortgages make up 20% of banks' loan portfolios, while charge-offs have spiked to roughly 0.55% to 0.60% of total loans as of the first quarter, up from roughly 0.15% a year earlier, according to Fitch presentation materials.