E*TRADE Group (ETFC)

[Joemoney]

S&P sees downgrades for some US securities firms

NEW YORK, Nov 6 (Reuters) - Some U.S. banks and brokerages could see their ratings cut as the slumping economy hits profits and asset quality, but the outlook for the sector as a whole is stable, Standard & Poor's analysts said on Tuesday.

``We expect profits to be mediocre but not negative in any dramatic fashion, and we expect some ratings downgrades,'' analyst Robert Swanton said in a conference call. ``We certainly don't expect a sector decline.''

S&P has negative outlooks on Merrill Lynch & Co. (NYSE:MER - news), Morgan Stanley (NYSE:MWD - news), Goldman Sachs Group Inc. (NYSE:GS - news), Bear Stearns Cos. (NYSE:BSC - news) and Charles Schwab Corp. (NYSE:SCH - news), while E*Trade Group Inc.'s (NYSE:ET - news) ratings were cut earlier this year.

``Precious few business lines have been spared the decline in volumes and demand that the economy has caused,'' Swanton said. Apart from bond underwriting, which has been boosted by falling interest rates, ``most business lines remain stagnant,'' he said.

As a result, more layoffs and restructurings are likely, said S&P analyst Charles Rauch.

Initial public offerings, secondary stock offerings, trading and mergers and acquisitions are all hurting as U.S. equities approach their first two-year decline since 1973-74, he said.

At the same time, compensation costs -- the largest cost for investment banks by far -- have been growing in recent years, Rauch said.

``All rated securities firms have been adding to staff over the last couple of years,'' even into year 2000 when revenues had begun to slow, he said. Companies have since cut staff and expenses, but only Merrill Lynch had reduced its head count to below 1999 levels by the end of the third quarter, he said.

Bad loans also are likely to mount, said analyst Tanya Azarchs. Though nonperforming loans leveled off in the third quarter, ``the worst is not yet over,'' she said.

Still, most banks have considerable cushion in their earnings to raise reserves or cover higher levels of charges, she said. ``For the type of cycle we're expecting, it will be more an earnings event rather than a hit to capital when nonperformers peak,'' she said.

http://biz.yahoo.com/rf/011106/n06349357_2.html