Third-quarter earnings of U.S. banks have remained firm, and this factor lends support to a stable outlook for their credit quality according to Moody’s Investors Services.

Analysts from Moody’s do see some clouds on the earnings horizon, however. “The likelihood for a longer, deeper recession has clearly increased,” they said, “one that will push up credit costs, increase margin pressures, and deflate lending volume. Consequently, we continue to expect that future earnings will be under pressure due to rising credit costs, margin pressures, and weaker volumes. Quarterly losses cannot be ruled out, resulting from recognition of higher credit expenses.”

The analysts also noted that the number of non-investment-grade corporate downgrades has been rising, and that the underlying assets in this indicator tend to mirror those in the commercial portfolios of the U.S. banks. Thus, overall asset quality will most likely continue to erode, and Moody’s believes that this will not peak until late 2002 .

Nevertheless, Moody’s remains confident that that these negative factors will not be sufficient to undermine the great majority of current bank ratings.

“Over the next few quarters, we think that the nation’s banking system won’t experience much more than a slightly sharper cyclical-earnings decline, most of which has already been factored into our ratings, and we believe that this earnings fall-off should be cushioned by generous reserves and prudent liquidity,” the analysts stated. “Moreover, the banks’ long-term earning prospects are still in place and should stay vibrant.”