Moody’s, the credit rating agency, made significant changes to its evaluations of several smaller to mid-sized U.S. banks on Monday. Additionally, it issued a cautionary note indicating the possibility of downgrading some of the country’s largest banks. The agency expressed concern that the credit strength of the banking sector might face challenges due to funding risks and decreased profitability.
In this move, Moody’s decreased the credit ratings of 10 banks by one level and placed six major banking institutions, including Bank of New York Mellon, US Bancorp, State Street, and Truist Financial, under review for potential downgrades. Explaining its decision, Moody’s stated that the second-quarter performance of many banks revealed mounting pressures on profitability, which could limit their ability to generate internal capital.
These actions come in the context of a projected mild economic downturn in the U.S. by early 2024. Moody’s anticipates a potential decline in the quality of assets, particularly in the commercial real estate portfolios of certain banks. The agency highlighted risks associated with elevated commercial real estate exposures, driven by factors such as high interest rates, reduced office demand due to remote work, and constraints on credit availability for commercial real estate.
Moody’s also altered its perspective to negative for eleven major lenders, including Capital One, Citizens Financial, and Fifth Third Bancorp.
The U.S. banking sector faced a confidence crisis earlier this year following the collapse of Silicon Valley Bank and Signature Bank. Despite emergency measures taken by authorities to restore confidence and stabilize the situation, the incident triggered deposit withdrawals from various regional banks. Moody’s underlined that banks holding significant unrealized losses, not reflected in their regulatory capital ratios, could be susceptible to reduced confidence in the prevailing high-rate environment.
This comprehensive report comes amid tighter monetary conditions following a series of rapid interest rate increases by the Federal Reserve, which has dampened demand and borrowing activity. The higher interest rates have also heightened concerns about a potential economic recession and added pressure on sectors like real estate to adapt to post-pandemic realities.
Recent data from a Federal Reserve survey indicated that U.S. banks experienced tighter credit standards and decreased loan demand from both businesses and consumers during the second quarter. Analysts at Morgan Stanley predict that the weakening trend in loan demand will persist, albeit at a slower rate of change.
It’s worth noting that another rating agency, Fitch, downgraded the United States’ credit rating by one level to AA+ due to anticipated fiscal challenges over the next few years, compounded by repeated last-minute negotiations regarding the debt ceiling.
