Credit measures continued to slide in housing-related portfolios, even for banks outside of the more troubled regions of the US, and these further dampened results for the US regional banking sector in the third quarter, according to a report by ratingd firm Standard & Poor's.

The report, titled "Stable Core Fundamentals Haven't Offset Weak Credit Conditions For Large US Regional Banks", asserts S&P's view that the higher loan loss reserves the banks built were appropriate.

"Those companies facing persistent credit pressure continue to build reserves. The others provisioned at least to cover their net charge-offs," said S&P credit analyst Daniel Teclaw, author of the report. "We now expect strong reserve building to continue at least through the first half of 2009."

Highlights of the report:
- Less deterioration in credit quality occurred outside the most troubled regions; however, credit quality worsened in the hard-hit Arizona, California, Florida, Michigan, and Nevada markets.

- Commercial banks that primarily lend, mainly in the South and Midwest, generally had very weak credit quality. This continued to decline even further in the quarter.

- Predominantly fee-oriented banks showed generally good operating results. However, they felt some negative impact from lower asset prices in weaker equity markets, capital support extended to proprietary investment funds, and exposure to Lehman Brothers Holdings Inc, which declared bankruptcy in September.

- Reasonable lending opportunities appeared to exist in small-to-mid-size business lending and in other niche segments, but quality corporate lending opportunities remained scarce.

Net interest margins held steady or improved from the prior quarter, and the banks have carefully managed their expenses in this environment.

Nonetheless, unusual charges have become recurring events, including charges related to other-than-temporary impairments on Fannie Mae and Freddie Mac preferred stock investments and realization of write-downs on private-label Alt-A residential mortgage-backed securities. A higher proportion of securities are breaching the threshold for impairment.

Capital for the financial institutions sector has been in the public eye following the implementation of the U.S. government's Treasury Capital Purchase Plan, which allocated up to $250 billion of the $700 billion Troubled Asset Relief Program (TARP) funds to purchase preferred stock from selected US banks.

"We view the additional capital injections as stabilizing agents and meaningful tools for adding liquidity and absorbing potential losses for those companies that remain exposed to ongoing credit problems," said Teclaw. "We also view the plan as a positive example of the government's commitment to moderating systemic risk in the banking industry."