Moody's lowers ratings of US banks, signals potential reductions for others

Moody's, the global credit rating agency, has downgraded the credit ratings of several small to mid-sized U.S. banks, sounding an alarm about the possible downgrades for some of the nation's largest lenders. The move comes as the agency warns of looming challenges to the sector's credit strength due to funding risks and diminishing profitability.

The credit rating agency lowered the ratings of ten banks by a single notch and placed six major banking giants, including Bank of New York Mellon, US Bancorp, State Street, and Truist Financial, under review for potential future downgrades.

Moody's cited the second-quarter results of many banks, revealing mounting pressure on profitability that could hamper their ability to generate internal capital. This precarious situation coincides with predictions of a mild U.S. recession on the horizon for early 2024. Another concern revolves around the expected decline in asset quality, particularly in some banks' commercial real estate (CRE) portfolios.

The agency highlighted the increased vulnerability stemming from high interest rates, decreased office demand due to remote work trends, and reduced availability of credit for commercial real estate. Moody's altered its outlook to negative for eleven major lenders, including Capital One, Citizens Financial, and Fifth Third Bancorp.

The U.S. banking sector has already been grappling with a crisis of confidence triggered by the collapses of Silicon Valley Bank and Signature Bank earlier this year. These incidents led to deposit runs at various regional banks, despite emergency measures introduced by authorities to restore confidence.

Moody's also emphasized the risks for banks holding substantial unrealized losses not reflected in their regulatory capital ratios, which could lead to a loss of confidence in the current high-rate environment.

Moody's downgraded banks list includes M&T Bank, Pinnacle Financial Partners, Prosperity Bank, and BOK Financial Corp. With the landscape of U.S. banking facing increased scrutiny and challenges, market observers are keenly monitoring developments in the financial sector.

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