Moody's, a prominent credit rating agency, has made significant adjustments to the credit ratings of various U.S. banks, both small and large.
- Credit Rating Adjustments:
- Moody's downgraded the credit ratings of 10 small and mid-sized U.S. banks.
- Major banks such as Bank of New York Mellon, U.S. Bancorp, State Street, Truist Financial, Cullen/Frost Bankers, and Northern Trust are under review for potential downgrades.
- The outlook for 11 banks, including Capital One, Citizens Financial, and Fifth Third Bancorp, has been changed to negative.
- Smaller banks that received a rating downgrade include M&T Bank, Pinnacle Financial, BOK Financial, and Webster Financial.
- Reasons for the Downgrades:
- U.S. banks are grappling with interest rate and asset-liability management (ALM) risks, which have implications for liquidity and capital.
- The end of unconventional monetary policy is leading to a reduction in system-wide deposits, and higher interest rates are affecting the value of fixed-rate assets.
- Many banks' Q2 results indicated increasing profitability pressures, which could impact their ability to generate internal capital.
- A mild U.S. recession is anticipated for early 2024, and asset quality is expected to decline, especially in the commercial real estate portfolios of some banks.
- Backdrop:
- Earlier this year, the collapse of Silicon Valley Bank and Signature Bank led to a run on deposits across the sector, which eventually spread to Europe. This resulted in the emergency rescue of Credit Suisse by UBS.
- Moody warns that banks with significant unrealized losses not reflected in their regulatory capital ratios might still be vulnerable to sudden losses of market or consumer confidence, especially in a high-interest rate environment.
- Federal Reserve's Actions:
- The Federal Reserve raised its benchmark borrowing rate to a range of 5.25%-5.5% in July as part of its aggressive monetary policy tightening to control inflation.
- Moody's expects the risks related to banks' ALM to increase due to the Federal Reserve's policy rate hike and the ongoing reduction in banking system reserves at the Fed.
- Regional Banks at Greater Risk:
- Regional banks are more vulnerable because they typically have lower regulatory capital.
- Banks with a higher proportion of fixed-rate assets are more limited in terms of profitability and their ability to grow capital and continue lending.
- The risks could intensify if the U.S. enters a recession in early 2024, as asset quality would deteriorate, leading to potential capital erosion.
- Future Outlook:
- While the current stress on U.S. banks is primarily due to funding and interest rate risks from monetary policy tightening, Moody's anticipates a decline in asset quality.
- Moody's expects a mild recession in early 2024, which, combined with the funding strains on the U.S. banking sector, will likely result in tighter credit conditions and increased loan losses for U.S. banks.
In summary, Moody's has adjusted the credit ratings of several U.S. banks due to concerns about interest rate and ALM risks, the potential for a mild recession in 2024, and the anticipated decline in asset quality.