Andy Kazie, Deposit Photos
On Tuesday, Moody’s Investors Service slashed the credit ratings of 10 small and midsize banks and warned of downgrading big banks as the sector faces uncertainty.
Moody’s Investors Service downgraded 10 banks by one notch, and placed six banking giants, including Bank of New York Mellon, US Bancorp, State Street and Truist Financial on review for potential downgrades.
Among the banks that were downgraded were M&T Bank, Pinnacle Financial Partners, Prosperity Bank and BOK Financial Corp.
The agency also changed its outlook to negative for eleven major lenders, including Capital One, Citizens Financial and Fifth Third Bancorp.
“Many banks’ second-quarter results showed growing profitability pressures that will reduce their ability to generate internal capital,” Moody’s said in a note.
“U.S. banks continue to 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,” Moody’s analysts Jill Cetina and Ana Arsov said in the accompanying research note.
This news comes amid rising interest rates, putting a strain on the U.S. economy. Moody’s warned that “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 U.S. interest rates also are moving higher because of multiple factors, which will put further pressure on banks’ fixed-rate assets.”
Moody’s is currently projecting that a mild U.S. recession is likely in early 2024 and that asset quality, particularly in commercial real estate portfolios, looks set to decline.
“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,” the agency said.
The news of these bank downgrades comes one week after Fitch downgraded America’s “AAA” rating to AA+, citing “a steady deterioration in standards of governance” as the reason for the downgrade.
The S&P downgraded it’s AAA rating for the U.S to AA+ in 2011, marking the first time the U.S. has been downgraded since the rating was assigned in 1917, but has kept that rating since.