Bank shares in the US witnessed a steep fall on Tuesday after ratings firm Moody’s Corporation (MCO) cut the ratings of various US bankers.
Moody’s downgraded the credit ratings of multiple small-and medium-sized US banks and issued similar warnings to various big Wall Street lenders. The agency lowered the ratings of ten banks, including Pinnacle Financial, BOK Financial, and M&T Bank, by one rug. Other major lenders, such as Bank of New York Mellon, U.S. Bancorp, Cullen/Frost Bankers, Northern Trust, and State Street, are being reviewed for a possible downgrade.
The Ratings Agency also changed its reviews to negative for eleven banks, including Fifth Third Bancorp and Capital One.
According to Moody’s analysts Jill Cetina and Ana Arsov, US banks continually “contend with interest rate and asset-liability management (ALM) risks with implications for liquidity and capital, as the wind-down of unconventional monetary policy drains systemwide deposits and higher interest rates depress the value of fixed-rate assets.”
At the same time, many banks’ second-quarter results highlighted “increasing profitability pressures that will reduce their ability to generate internal capital,” they added.
Regional US banks made headlines earlier this year when the Silicon Valley Bank and Signature Bank collapsed, inciting panic across Europe and leading to domestic competitor UBS rescuing the Swiss giant Credit Suisse.
Moreover, regional banks possess greater risk since their regulatory capital is relatively lower. Lenders with higher shares of fixed-rate assets on the balance sheet are less flexible regarding profitability and the ability to expand capital and continue lending.
The analysts mentioned the risks in the reports, claiming, “Risks may be more pronounced if the U.S. enters a recession – which we expect will happen in early 2024 – because asset quality will worsen and increase the potential for capital erosion.”
Though authorities made significant efforts to do damage control and regain confidence, Moody’s warned that lenders with considerable unrealized and uncaptured losses by their regulatory capital ratios might still face sudden market losses or a drop in consumer trust in a high-interest rate system.
The Federal Reserve strengthened its monetary policy over the past year and a half and lifted its standard borrowing rate in July to a 5.25%-5.5% range to enable soaring inflation.
According to Moody’s report, “Interest rates are likely to remain higher for longer until inflation returns to within the Fed’s target range and, as noted earlier, longer-term US interest rates also are moving higher because of multiple factors, which will put further pressure on banks’ fixed-rate assets.”
Despite the pressure on US banks mainly focusing on funding and interest rate risk stemming from tight monetary policies, Moody’s has warned that it may still lead to a downgrade in the asset quality.
“We continue to expect a mild recession in early 2024, and given the funding strains on the U.S. banking sector, there will likely be a tightening of credit conditions and rising loan losses for U.S. banks,” Moody’s said.