Moody's, an international credit rating agency, downgraded the credit ratings of several smaller to medium-sized U.S. banks on Monday and warned that some of the largest lending institutions in the United States might be downgraded, citing that the banking industry's credit strength could face tests of funding risks and weaker profitability.
Moody's downgraded the ratings of 10 banks, including M&T Bank, Pinnacle Financial Partners, Prosperity Bank, and BOK Financial Corp, by one notch and placed the ratings of six banking giants, including The Bank of New York Mellon, U.S. Bancorp, State Street, and Truist Financial, under review for potential downgrade.
Moody's stated in a release that many banks' second-quarter performances exhibited increasing profit pressures, which would reduce their ability to generate internal capital. This situation is related to a potential mild recession that the U.S. could experience in early 2024 and a possible decline in the quality of bank assets, particularly in some banks' commercial real estate (CRE) investment portfolios that pose specific risks.
Moody's noted that commercial real estate (CRE) risk exposure has increased due to higher interest rates, a decrease in office demand due to remote work, and a reduction in the availability of commercial real estate credit.
The agency also adjusted the outlook to negative for eleven major lending institutions, including Capital One, Citizens Financial, and Fifth Third Bancorp. This type of outlook adjustment often draws the attention of investors, creditors, and the market because it implies that these institutions may face greater uncertainty and challenges in the coming period, which could impact their credit ratings and market positions.
Earlier this year, the collapses of Silicon Valley Bank and Signature Bank triggered a crisis of confidence in the American banking sector, despite emergency measures taken by authorities to boost customer confidence, leading to deposit runs on several regional banks. This situation could make investors uneasy about the health and financial security of banks, leading to instability in funds flow and financial markets.
Moody's warned that in the current high-interest-rate environment, banks with substantial unrealized losses not reflected in their regulatory capital ratios could suffer from a loss of confidence.
Moody's warned that banks holding substantial unrealized losses, if not adequately reflected in their regulatory capital ratios in the current high-interest-rate environment, might face the risk of investor confidence loss.
This comprehensive report comes at a time when the Federal Reserve has undertaken the fastest pace of interest rate hikes in decades, leading to a tightening of monetary policy. Such policy changes have resulted in a slowdown in demand and lending activity in the economy. Higher interest rates have also raised recession concerns and placed pressure on sectors such as real estate to adjust to the post-pandemic reality.
Recent survey data released by the Federal Reserve reported a tightening of credit standards for businesses and consumers in the second quarter, along with a decrease in loan demand. This means banks are more rigorously scrutinizing loan applications, and the demand for loans by businesses and consumers has correspondingly diminished.
Analysts at Morgan Stanley predict that loan demand will continue to weaken and that the rate of change will further decelerate.
Peer rating agency Fitch downgraded the United States' rating by one notch to AA+ due to fiscal deterioration anticipated over the next three years and repeated occurrences of negotiations close to the debt ceiling.
