) --

Moody's Investor Service

(MCO) - Get Report

reiterated in its latest banking industry update what Wall Street analysts and market observers have been saying for months -- that the U.S. banking system will continue to suffer at least through the end of next year.

The ratings service, which has a negative outlook for the banking industry, said that asset-quality troubles will force many banks to record "substantial additional provisions" for the rest of 2009 and all of 2010, making many companies unprofitable for extended periods and adding further stress to their capital levels, according to a report issued on Thursday.

"We do not believe asset quality deterioration for the U.S. banking industry has reached its peak, and we therefore anticipate multiple quarters of losses for a large number of rated banks," Moody's Vice President and Senior Credit Officer Craig Emrick said in a statement.

In the first half of 2009, banks had $70 billion in net charge-offs, totaling about 1.3% of loans outstanding as of Dec. 31. Non-performing loans had risen to a "sizable" 4.3% of all loans by June 30, Moody's said Thursday.

Even more frightening, 44% of U.S. banks rated by Moody's posted a net loss due to provisioning needs in the second quarter, it said.

Moody's also pointed out that in some cases, commercial real estate "has caught up with -- and has surpassed by some measures" deterioration in residential real estate. Commercial real estate nonperforming loans total 7.2% of loans, while nonperforming loans in residential real estate total 5%, it said.

Residential construction loans seem to be the worst of it, showing "significant deterioration," Moody's noted. Commercial and residential construction nonperforming loans totaled 9.2% and a whopping 25.8%, respectively, on June 30, while aggregate annualized net charge-offs were 5.4% and 8.9% for the quarter, Moody's said.

Moody's first published its industry outlook in June, where it predicted that U.S. banks will incur approximately $470 billion worth of writedowns and losses during 2009 and 2010, mostly from bad loans, but also from underwater securities. The lending portion of this estimated loss is $415 billion, or 7.5% of banks' outstanding loans as of the end of 2008, Moody's said.


International Monetary Fund

predicts that large U.S. and European banks could see cumulative losses on toxic assets as high as $2.5 trillion since the beginning of 2007 through 2010.

To be fair, not all was dire in the first half of the year. Larger banks including

JPMorgan Chase

(JPM) - Get Report


Bank of America

(BAC) - Get Report

, and even


(C) - Get Report

were more profitable in the quarter because of capital markets activities.

Many banks also experienced slight declines in their so-called early-stage delinquencies, as well as a stabilization of the ratio of allowance for loan losses to nonperforming loans from the first quarter at 78% (even though its still at a low level), Moody's said.

A host of banks were also able to access the equity markets during the quarter to raise capital both on their own and as designated by the U.S. government.

Wells Fargo

(WFC) - Get Report


Bank of New York Mellon

(BK) - Get Report


US Bancorp

(USB) - Get Report


PNC Financial Services

(PNC) - Get Report


SunTrust Banks

(STI) - Get Report

and a host of other regional and small banks tapped the equity markets this spring.

--Written by Laurie Kulikowski in New York.