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

by KERRI PANCHUK

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."

URL to original article: http://www.housingwire.com/2011/05/27/another-collapse-in-home-prices-would-hinder-bank-earnings-sp

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