Moody's cuts ratings of 10 U.S. banks and puts some big names on downgrade watch

Moody's chopped the recognition ratings of a big of tiny and mid-sized U.S. banks precocious Monday and placed respective Wall Street large names connected antagonistic review.

The ratings bureau chopped the ratings of 10 banks by 1 rung, portion large lenders Bank of New York Mellon, U.S. Bancorp, State Street, Truist Financial, Cullen/Frost Bankers and Northern Trust are present nether reappraisal for a imaginable downgrade.

Moody's besides changed its outlook to antagonistic for 11 banks, including Capital One, Citizens Financial and Fifth Third Bancorp.

Among the smaller lenders receiving an authoritative ratings downgrade were M&T Bank, Pinnacle Financial, BOK Financial and Webster Financial.

"U.S. banks proceed to contend with involvement complaint and asset-liability absorption (ALM) risks
with implications for liquidity and capital, arsenic the wind-down of unconventional monetary argumentation drains systemwide deposits and higher involvement rates depress the worth of fixed-rate assets," Moody's analysts Jill Cetina and Ana Arsov said successful the accompanying probe note.

"Meanwhile, galore banks' Q2 results showed increasing profitability pressures that volition trim their quality to make interior capital. This comes arsenic a mild U.S. recession is connected the skyline for aboriginal 2024 and plus prime looks acceptable to diminution from coagulated but unsustainable levels, with peculiar risks successful immoderate banks' commercialized existent property (CRE) portfolios."

Regional U.S. banks were thrust into the spotlight earlier this twelvemonth aft the collapse of Silicon Valley Bank and Signature Bank triggered a tally connected deposits crossed the sector. The panic yet dispersed to Europe and resulted successful the emergency rescue of Swiss elephantine Credit Suisse by home rival UBS.

Though authorities went to large lengths to reconstruct confidence, Moody's warned that banks with important unrealized losses that are not captured by their regulatory superior ratios whitethorn inactive beryllium susceptible to abrupt losses of marketplace oregon user assurance successful a precocious involvement complaint environment.

The Federal Reserve successful July lifted its benchmark borrowing complaint to a 5.25%-5.5% range, having tightened monetary argumentation aggressively implicit the past twelvemonth and a fractional successful a bid to rein successful sky-high inflation.

"We expect banks' ALM risks to beryllium exacerbated by the important summation successful the Federal Reserve's argumentation complaint arsenic good arsenic the ongoing simplification successful banking strategy reserves astatine the Fed and, relatedly, deposits due to the fact that of ongoing QT," Moody's said successful the report.

"Interest rates are apt to stay higher for longer until ostentation returns to wrong the Fed's people scope and, arsenic noted earlier, longer-term U.S. involvement rates besides are moving higher due to the fact that of aggregate factors, which volition enactment further unit connected banks' fixed-rate assets."

Regional banks are astatine a greater hazard since they person comparatively debased regulatory capital, Moody's noted, adding that banks with a higher stock of fixed-rate assets connected the equilibrium expanse are much constrained successful presumption of profitability and quality to turn superior and proceed lending.

"Risks whitethorn beryllium much pronounced if the U.S. enters a recession – which we expect volition hap successful aboriginal 2024 – due to the fact that plus prime volition worsen and summation the imaginable for superior erosion," the analysts added.

Though the accent connected U.S. banks has mostly been concentrated successful backing and involvement complaint hazard resulting from monetary argumentation tightening, Moody's warned that a worsening successful plus prime is connected the horizon.

"We proceed to expect a mild recession successful aboriginal 2024, and fixed the backing strains connected the U.S. banking sector, determination volition apt beryllium a tightening of recognition conditions and rising indebtedness losses for U.S. banks," the bureau said.