Following Fitch lead Moody’s downgraded credit ratings of small & mid-sized U.S. banks on funding risk, office exposure
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“Many banks’ Q2 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.”
U.S. banks’ Q2 earnings showed “material” increases in funding costs and profitability pressures related to the Federal Reserve’s aggressive tightening. “Higher interest rates continue to reduce the value of fixed rate securities and loans, and this risk is not captured well in bank regulation and can create liquidity risks,” Moody’s said.
While banks will benefit from the Fed’s liquidity backstops and the Federal Home Loan Bank system funding, these sources require collateral and come at a greater cost than deposits.
Most U.S. banks are subject to lower capital requirements than the largest lenders, leaving some more vulnerable to a loss of investor confidence, especially those with sizable losses due to higher rates (not reflected in their regulatory capital ratios).
Moody’s said small and mid-size banks with greater exposure to commercial real estate – especially in construction and office lending – face more risks due to economic slowdown and weak demand for office space driven by work-from-home trends.
The banks that were downgraded include M&T Bank (MTB), Pinnacle Financial Partners (PNFP) and Old National Bancorp (ONB).
The lenders on review for downgrade are Bank of New York Mellon (BK), U.S. Bancorp (USB), State Street (STT), Truist Financial (TFC), Cullen Frost (CFR), and Northern Trust (NTRS).
Moody’s also revised its outlook to negative for some banks including Capital One (COF), PNC Financial Services (PNC) and Fifth Third Bancorp (FITB).