Moody's Cuts Ratings on 10 U.S. Banks
Moody's has cut credit ratings on ten U.S. regional and mid-sized banks and put some of the nation's largest lenders on notice for potential downgrades. The move sent tremors through financial markets, raising concerns about borrowing costs and credit availability in regions like New England.
The credit rating agency's action impacted ten specific small and mid-sized banks with a one-notch downgrade, including M&T Bank, Webster Financial, BOK Financial, and Pinnacle Financial Partners. These institutions are now considered investment grade, but the move signals increasing financial strain. Six larger banking giants have also been placed on a watchlist for potential downgrades. This group includes prominent names like U.S. Bancorp, Bank of New York Mellon, State Street, and Truist Financial. Additionally, Moody's shifted its outlook to negative for eleven other major lenders, such as Capital One and Citizens Financial. The downgrades are rooted in several mounting pressures on the banking sector. Moody's cited the Federal Reserve's series of interest rate hikes, which have increased banks' funding costs and compressed their net interest margins—the difference between what banks earn on loans and pay out for deposits. Concerns over asset quality, particularly in commercial real estate (CRE), were a key factor. Moody's highlighted that sustained high interest rates and the structural decline in office space demand due to remote work pose a significant risk to banks with substantial CRE loan portfolios. This ratings action follows the banking turmoil earlier in 2023 that saw the collapse of Silicon Valley Bank, Signature Bank, and First Republic. Moody's noted that some of the systemic risks that led to those failures, such as the potential for rapid depositor withdrawals and unrealized losses on bond holdings, persist in the current high-interest-rate environment. The market reacted immediately to the news, with the KBW Nasdaq Bank Index falling nearly 2% on the day of the announcement. Stocks of the downgraded banks, like M&T Bank, and those under review, such as Truist Financial, saw notable declines as investors digested the increased risk assessment.
