We maintain a Negative outlook on the U.S. Banks — though we are now less negative than we were at the time of our earlier reports, as we see some signs of deceleration in the economic slowdown. Further, we are hopeful about the Treasury’s Financial Stability Plan, but we think that the effect will take quite some time to come by.

While the various programs launched by the Treasury and the Federal Reserve to boost the capital levels and alleviate the liquidity problems (including capital injections and debt guarantee programs) have helped the capital and funding concerns to a great extent, the efforts have not succeeded in restoring the lending activity at banks. Lower lending activity will continue to hurt the margins though the low interest rate environment should be beneficial to the banks with a liability sensitive balance sheet.

For the last few quarters, the banks have mainly suffered due to the losses in the mortgages and Commercial Real Estate (residential construction loans). Housing prices have continued to decline, and given the sharp increase in the level of unemployment, we anticipate continued losses in these portfolios. Further, deterioration in other Commercial Real Estate loans has started rather recently, and the downturn in this class in also likely to be very challenging.

With the deterioration in the overall economic environment and rising job losses, we anticipate the losses will increase in all the other asset classes as well, especially in the consumer-related loans. It was recently reported that U.S. credit card delinquencies rose to a record high in February and are expected to rise further. We expect the asset quality deterioration to continue at least through the end of FY09.

As a result of rise in charge-offs, the levels of reserve coverage have fallen over the past quarters and the banks will have to make higher provisions in the coming quarters, affecting the profitability. Further, the banks will also continue to take mark-downs in the investment portfolios, further hurting the bottom-line.

OPPORTUNITIES

We currently do not see any opportunities and thus do not have a Buy recommendation on any stocks within this industry.

WEAKNESSES

The banks with high exposure to housing and Commercial Real Estate loans like Wilmington Trust Corporation (WL), KeyCorp (KEY), Zions Bancorp (ZION) and Comerica (CMA) will continue to remain under pressure.

We also maintain Sell recommendation on Freddie Mac (FRE) and Sallie Mae (SLM) as we anticipate rising losses and increased provisions through FY09. Zacks Investment Research

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