In this section we look at the US banks, with a focus on those covered by Deutsche Bank.

Since the US credit crisis began in 2007, loan loss provisions have averaged 3.1% of average loans. We believe credit losses for US banks peaked in 2009 (at 4.65% of loans) and declined to 2.6% in 2010.

Despite the US labor and housing markets slow recovery, we believe credit quality at US banks will continue to improve given most US banks continue to runoff high-risk loans, and benefit from loss mitigation, loan resolution/modification programs. We estimate loan loss provisions declining to about 1% of average loans by 2011 (or $40-45b-half of what it was in 2010).

Leverage ratios remain elevated in the US. Nonfinancial (and nongovernment) debt to equity (or net worth) remains well above historical levels. In total, US debt/equity was 34% at the end of 2010, down from a peak of 38% at 12/31/08, but well above the historical average of 28% since 1986.

Credit mix has improved for US banks, given many banks have repositioned loan portfolios by reducing exposure to subprime, option adjustable rate mortgages, home equity, non-owner occupied/multi-family commercial real estate (CRE).

For the US banks under our coverage, residential real estate (including home equity/2nd lien mortgages) represent 30% of loans and CRE represents 16%. In our view, these categories represent the longer-term credit risks for the sector.

With regards to the Danger Map, we score the US at 22 out of 45. This puts US in the middle of the pack on the Danger Map.

Eoin Treacy's view The problems in the European banking sector and among the periphery's sovereigns have garnered a large number of column inches. The USA is not without its own problems but the Eurozone is not one of them. The housing market continues to dominate US concerns but the US government has demonstrated that, post Lehman Brothers, it is willing to intervene to ensure the orderly functioning of markets which in all likelihood means avoiding a major financial sector default.

The S&P 500 Banks Index led on the downside from February 2007 and hit a meaningful low in early 2009. It has been largely rangebound for much of the last two years but trended lower since early this year. It has steadied above the 100 area over the last two months and tested the upper side of this short-term range yesterday. A sustained move above 120 would be required to signal a return to demand dominance beyond the short term.

The S&P 500 Diversified Financials Index has been weaker over the last couple of months and posted a new reaction low last week. It has bounced somewhat but needs to hold a move above 260 to break the progression of lower rally highs and question supply dominance. The KBW Regional Banks Index has a similar pattern.