The US banking sector is facing a turbulent period as credit rating agencies deliver successive downgrades to several banks. S&P Global and Moody’s have recently lowered credit ratings for regional banks, causing ripples across the financial landscape. These actions come against the backdrop of a challenging lending environment, where factors like weaker funding, deposit outflows, and rising interest rates have raised concerns.
S&P Global Downgrades Five Regional Banks
S&P Global has downgraded the credit ratings of five regional U.S. banks and revised the outlook for several other lenders, attributing these actions to concerns about the challenging lending environment. In a recent statement, the rating agency indicated that it had lowered the credit ratings of KeyCorp, Comerica Bank, Valley National Bancorp, UMB Financial Corp., and Associated Banc-Corp by one notch. The rationale for this decision was rooted in the increasing risks associated with weaker funding, substantial deposit outflows, and the upward movement of interest rates.
Moreover, S&P Global has also shifted its outlook for S&T Bank and River City Bank to negative from its previous stable assessment. This alteration in outlook was based on the notable exposure these banks hold to commercial real estate. The rating agency said that these banks could face higher credit losses and lower profitability if the commercial real estate market deteriorates further.
Moody’s Warns of More Pain for US Banks
The downgrade by S&P Global comes closely after another major credit rating agency, Moody’s, unsettled financial markets by announcing a downgrade of the credit ratings for ten smaller and medium-sized banks by one level. Additionally, it placed six major banking entities, including U.S. Bancorp, Bank of New York Mellon, and Truist Financial, under review for potential future downgrades.
Moody’s had reduced the ratings of firms like M&T Bank, Pinnacle Financial, BOK Financial, Webster Financial, Old National Bancorp, and Fulton Financial. The agency cited challenges stemming from interest rate fluctuations and asset-liability management risks, which impact liquidity and capital as unconventional monetary policies are phased out, leading to shifts in deposits and devaluation of fixed-rate assets.
Moody’s also warned that some other banks faced risks of customer withdrawals, especially those that had substantial unrealized securities losses and non-retail and uninsured US depositors. The agency said that these banks may be more sensitive to depositor competition or ultimate flight.
Turmoil in the Financial Sector
The recent turmoil in the financial sector was triggered by the unexpected collapse of Silicon Valley Bank and Signature Bank, two prominent lenders to technology firms. These banks failed last week after a rush of customer withdrawals, sparked by the disclosure that they needed to raise money and had been forced to sell a portfolio of assets, mostly government bonds, at a loss.
US regulators took over the banks and said they would guarantee deposits beyond the $250,000 level typically insured by the government. They also implemented emergency measures to restore confidence in the banking system. However, regional banks remain cautious and apprehensive.
The collapse of these banks also coincided with an unusually aggressive tightening of monetary policy by the Federal Reserve, marking one of the most notable campaigns in decades. In July, the Fed approved another increase in interest rates, resulting in the benchmark rate reaching its highest level since 2001. The Fed is expected to slow or pause its rate hikes when it meets next week amid concerns over inflation and economic growth.
