NEW YORK -Moody's Investors Service said its outlook for the US banking industry remains negative, as low interest rates and tepid economic growth will continue to hurt banks' finances over the next 12 to 18 months.

The rating agency also said in a report issued yesterday that uncertainty over a plan to reduce the federal budget deficit as well as the debt crisis in Europe create a difficult environment for US banks.

Moody's has raised its credit rating outlooks for most US banks to "Stable" from "Negative" since early 2010 as banks have increased their cushions against losses. But Moody's said problems in the broader economy override that, as banks still carry many loans prone to default on their books and gains could be reversed if the economy turns downward.

Moody's warning follows recent data on banks from the Federal Deposit Insurance Corp. that adds to evidence that the industry is strengthening four years after the financial crisis. But regulators, including FDIC Chairman Martin Gruenberg and Federal Reserve Chairman Ben Bernanke, warn of the potential negative impact on the US economy and banks from the European debt crisis

The FDIC reported last week that US bank earnings rose 21 per cent in the second quarter of this year, to US$34.5 billion, while lending to consumers increased. Banks also have less fear of losses on loans. The amount they have set aside for possible losses has declined and their loan portfolios have grown safer as more customers have repaid on time. The number of troubled banks on the FDIC's confidential list in the April-June period fell for the fifth straight quarter.

Still, banks' revenue gains remain weak. Total revenue increased only US$1.3 billion — a slim 0.8 per cent — in the second quarter from a year earlier.