A number of minor lenders such as M&T Bank, Pinnacle Financial, BOK Financial and Webster Financial suffered an official ratings downgrade. The foremost banks like Bank of New York Mellon, U.S. Bancorp, State Street, Truist Financial, Cullen/Frost Bankers and Northern Trust are currently being assessed for a prospective downgrade.
Moody's took action late Monday and downgraded the credit ratings of a number of small and mid-sized U.S. banks. Several major Wall Street banks were also placed on negative review. Bank of New York Mellon, U.S. Bancorp, State Street, Truist Financial, Cullen/Frost Bankers, and Northern Trust are now all subject to a potential rating reduction. Additionally, the ratings agency set a negative outlook for Capital One, Citizens Financial, and Fifth Third Bancorp. Other banks to receive a downgrade in their official ratings include M&T Bank, Pinnacle Financial, BOK Financial, and Webster Financial.
In their accompanying research note, Moody's analysts Jill Cetina and Ana Arsov pointed out that U.S. banks have been encountering difficulties due to the declining value of fixed-rate assets as unconventional monetary policy drains deposits and higher interest rates take hold. Furthermore, increased pressure has been placed on banks' abilities to generate internal capital after second quarter results showed growing profitability issues. The agency particularly noted risks in some banks' commercial real estate portfolios.
Earlier in the year, market uncertainty was sparked by the collapse of Silicon Valley Bank and Signature Bank, with many banks in Europe requiring emergency rescue in the aftermath. Moody's warned that banks with sizable unrealized losses may still be vulnerable to abrupt changes in market or consumer confidence, especially with the Federal Reserve raising its benchmark borrowing rate to a 5.25%-5.5% range.
The agency's report anticipates that banks will experience additional ALM risks and fewer deposits as quantitative tightening (QT) continues. It is also believed that higher interest rates could remain the status quo for a longer period of time, thus resulting in more stress for fixed-rate assets. What's more, regional banks are particularly exposed since they have lower regulatory capital.
Moody's warned that if a mild recession is triggered in early 2024 as it expects, asset quality will suffer and have the potential to cause capital erosion. This would leave banks with a more constricted capacity to generate profits and support lending. The agency concluded by noting that a mild recession in early 2024 would bring about heightened loan losses and a tightening of credit conditions.
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