July 12, 2024

S&P Joined Moody’s in Downgrading Multiple U.S. Banks

Image Credit: BRENDAN MCDERMID/REUTERS

On August 22, S&P Global downgraded the credit ratings of five U.S. regional banks by one notch, including KeyCorp, Comerica Bank, Valley National Bancorp, UMB Financial Corp., and Associated Banc-Corp. The reason? A challenging lending landscape marked by weaker funding, hefty deposit losses, and climbing interest rates.

And that’s not all. Two weeks earlier, Moody’s shook things up by lowering ratings for ten smaller banks and putting six banking giants, like U.S. Bancorp, Bank of New York Mellon, and Truist Financial, under the microscope for potential downgrades.

“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 said of the decision.

Silicon Valley Bank and Signature Bank’s dramatic fall set off a storm in March, triggering a run on deposits. Officials scrambled to restore faith with emergency actions, but regional banks are still uneasy.

With the Federal Reserve unleashing the most aggressive interest rate hike campaign in decades, the pressure’s on. July saw another rate hike, taking us back to 2001 levels. This has created more stress for small- and mid-sized banks, which are seeing a spike in depositors who have “shifted their funds into higher-interest bearing accounts,” increasing banks’ funding costs, S&P said in an accompanying research note. 

A whirlwind of change hit the banking world in the last five quarters. Non-interest-bearing deposits took a 23% dive, while costlier certificates of deposits and brokered deposits skyrocketed, nearly doubling.

“While many measures of asset quality still look benign, higher rates are pressuring borrowers, and nonperforming assets, delinquencies, and charge-offs are rising toward at least their historical averages,” S&P said. “Amid higher for longer interest rates, we expect further asset quality deterioration.”

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