Moody's downgrades US banks, warns of possible cuts to others
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[August 08, 2023] By
Lananh Nguyen and Juby Babu
(Reuters) - Moody's cut credit ratings of several small to mid-sized
U.S. banks on Monday and said it may downgrade some of the nation's
biggest lenders, warning that the sector's credit strength will likely
be tested by funding risks and weaker profitability.
Moody's cut the ratings of 10 banks by one notch and placed six banking
giants, including Bank of New York Mellon, US Bancorp, State Street 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,"
Moody's said in a note.
"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."
Moody's said elevated CRE exposures are a key risk due to high interest
rates, declines in office demand as a result of remote work, and a
reduction in the availability of CRE credit.
The agency also changed its outlook to negative for eleven major
lenders, including Capital One, Citizens Financial and Fifth Third
Bancorp.
The collapse of Silicon Valley Bank and Signature Bank earlier this year
sparked a crisis of confidence in the U.S. banking sector, leading to a
run on deposits at a host of regional banks despite authorities
launching emergency measures to shore up confidence.
Still, Moody's cautioned that banks with sizable unrealized losses that
are not reflected in their regulatory capital ratios are vulnerable to a
loss of confidence in the current high-rate environment.
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Signage is seen outside the Moody's
Corporation headquarters in Manhattan, New York, U.S., November 12,
2021./File Photo
The sweeping report comes against the backdrop of tightening
monetary conditions after the fastest pace of interest rate
increases by the Federal Reserve in decades slows demand and
borrowing.
The higher rates have also raised the spectre of recession and put
pressure on sectors such as real estate to adjust to post-pandemic
realities.
Federal Reserve survey data released last week showed U.S. banks
reported tighter credit standards and weaker loan demand from both
businesses and consumers during the second quarter.
Morgan Stanley analysts said the loan demand is likely to continue
to weaken, with the rate of change slowing further.
Rating agency peer Fitch has downgraded the United States by a notch
to AA+ due to fiscal deterioration over the next three years and
repeated down-to-the-wire debt ceiling negotiations.
The downgraded banks by Moody's include M&T Bank, Pinnacle Financial
Partners, Prosperity Bank and BOK Financial Corp.
(Reporting by Juby Babu in Bengalurua and Ankur Banerjee in
Singapore; Editing by Shri Navaratnam and Stephen Coates)
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