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S&P Global downgrades US banks

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2023-08-22

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Moody’s had previously set the tone by issuing ratings adjustments affecting 27 US banks of varying sizes. Rival Fitch, last week, reminded observers of its June downgrade to the US banking sector's operating environment – an initial move leading up to a potentially significant downgrade, with even industry giant JPMorgan Chase at risk.

Then, on Monday night, the third major global rating agency, S&P Global, entered the fray, targeting the US banking landscape and issuing downgrades or warnings to numerous midlevel players.

S&P Global's actions were prompted by its prediction that the sector's credit strength would be tested due to funding risks and weakened profitability. Among its actions, S&P downgraded the ratings of Associated Banc-Corp and Valley National Bancorp due to funding risks and heightened dependence on brokered deposits. It also slashed the ratings for UMB Financial Corp, Comerica Bank, and Keycorp, citing substantial deposit outflows and persistently elevated interest rates.

In addition, S&P altered the outlook for S&T Bank and River City Bank from stable to negative, citing concerns about their substantial exposure to commercial real estate (CRE), among other factors.

Moody's had previously downgraded 10 banks by a single notch and placed six major banking entities, including Bank of New York Mellon, US Bancorp, State Street, and Truist Financial, under review for potential downgrades.

These reassessments have come in the wake of the failures of Silicon Valley Bank and Signature Bank earlier this year, along with issues at several other rapidly growing midlevel banks. These events sparked deposit withdrawals at various regional banks, despite emergency measures implemented by authorities to bolster confidence. Concerns and uncertainties surrounding US banks persist, as affirmed by S&P Global's recent actions.

The recent sharp increase in interest rates has cast a shadow over numerous US banks' funding and liquidity. The yield on the US 10-year Treasury note has surged past 4.2%, while the yield on the 2-year Treasury note has exceeded 5%. US mortgage yields have even surpassed 7%.

S&P Global stated in a summary of its rating adjustments that as long as the Federal Reserve continues "quantitative tightening" – shrinking its balance sheet to reduce post-pandemic debt burdens – deposits held by Federal Deposit Insurance Corp (FDIC)-insured banks will continue to dwindle. Some US analysts predict that this reduction in the Fed's balance sheet will exceed $1 trillion by the end of this month.

S&P highlighted that federally insured banks are grappling with unrealised losses exceeding $550 billion on their available-for-sale and held-to-maturity securities as of mid-year.

Moreover, if the Fed maintains high interest rates for an extended period, the situation could worsen for banks, eroding the value of loans for borrowers seeking refinancing.

S&P's actions are expected to temper any resurgence in Wall Street sentiment, drawing attention to rising bond yields, mounting economic issues in China, and ongoing inflation concerns.

Notably, S&P emphasised that its concerns do not encompass all US banks. As of Monday, the agency reported that 90% of the banks it rates have stable outlooks, while the remaining 10% have negative outlooks and none have positive outlooks.

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