Banks face tough time, in or out of TARP

By Jonathan Stempel and Elinor Comlay - Analysis

NEW YORK (Reuters) - Letting 10 of the biggest U.S. banks repay $68 billion (42 billion pounds) to the government may loosen Uncle Sam's grip on an industry still far from a recovery, but it also doesn't mean the banking industry is out of the woods.

Analysts believe the sector is at best in the middle stage of deterioration in several key areas of lending, including credit cards, commercial loans and commercial real estate.

And even if much of the slump in housing prices is in the past, interest payments on millions of adjustable-rate mortgages are expected to lurch higher between now and 2012.

"Now we have to go back on focussing on credit quality," said Nancy Bush, managing member of NAB Research LLC, an independent research firm.

Repaying TARP will free JPMorgan Chase & Co (JPM.N), Goldman Sachs Group (GS.N), Morgan Stanley (MS.N) and others from rules on what they can pay top performers and shareholders in the form of dividends.

The banks joined at least 22 smaller banks allowed to repay some or all of their taxpayer money. Most must still negotiate terms to buy back or extinguish the government's warrants to buy their common stock.

Nine other banks that underwent "stress tests" of their ability to weather a deep recession, including Bank of America (BAC.N) and Citigroup (C.N), plus some 600 other lenders still have TARP money outstanding.

Bank of America has indicated it would like to begin repaying its infusion this year, while Citigroup is preparing to give the government a possible 34 percent equity stake.