Moody's downgrades US banks, warns of possible cuts to major lenders

Moody's downgraded several small and mid-sized banks and put six major Wall Street lenders on negative watch amid concerns over higher interest rates.

Moody’s cut the credit ratings of several small and mid-sized banks and warned it may downgrade a handful of major Wall Street lenders.

The agency said late Monday that it lowered the ratings of 10 banks by one notch amid concerns over higher interest rates, rising funding costs and increased risk from the commercial real estate sector. Among the firms that had their ratings cut are M&T Bank, Pinnacle Financial, BOK Financial, Webster Financial, Old National Bancorp and Fulton Financial.

"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 wrote in an accompanying research note explaining the decision.

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Moody's also placed six banking giants – including U.S. Bancorp, Bank of New York Mellon and Truist Financial – on review for potential downgrades.

"Many banks' second-quarter results showed growing profitability pressures that will reduce their ability to generate internal capital," the firm said. "This comes as a mild U.S. recession is on the horizon for early 2024 and asset quality looks set to decline, with particular risks in some banks’ commercial real estate (CRE) portfolios."

The outlook of 11 other banks, including Capital One, Citizens Financial and Fifth Third Bancorp, was also changed to negative. 

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U.S. stocks sank on the news, with the Dow Jones Industrial Average down more than 450 points in early morning trading. 

Regional banks were just at the epicenter of recent upheaval within the financial sector after the stunning collapse of Silicon Valley Bank and Signature Bank triggered a deposit run in early March. 

Authorities rushed in to shore up confidence in the banking system with the launch of several emergency measures, but Moody's warned that banks with sizable unrealized losses that are not reflected in their regulatory capital ratios remain "vulnerable to a loss of investor confidence." 

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The downgrade comes in the midst of the most aggressive monetary policy tightening campaign in decades. The Federal Reserve in July approved another interest rate hike, lifting the benchmark rate to the highest level since 2001. 

"We expect banks’ ALM risks to be exacerbated by the significant increase in the Federal Reserve’s policy rate as well as the ongoing reduction in banking system reserves at the Fed and, relatedly, deposits because of ongoing QT," the Moody's report said. 

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