Moody’s Downgrades Ratings for 10 U.S. Banks and Places Major Names on Potential Downgrade Alert

Moody’s has recently taken actions that impact the credit ratings of various small and midsize banks in the United States. Late on Monday, the credit rating agency downgraded the credit ratings of 10 smaller banks by a single level. Additionally, several prominent financial institutions from Wall Street are now undergoing a negative review by Moody’s. Among these larger banks, such as Bank of New York Mellon, U.S. Bancorp, State Street, Truist Financial, Cullen/Frost Bankers, and Northern Trust, there is a possibility of a downgrade in their credit ratings. Moody’s has also altered its perspective to negative for 11 banks, including notable names like Capital One, Citizens Financial, and Fifth Third Bancorp. The recent changes are attributed to the ongoing challenges faced by U.S. banks, particularly concerning interest rate dynamics and asset-liability management risks. The normalisation of monetary policy and resulting reductions in deposits, coupled with rising interest rates impacting the value of fixed-rate assets, have put strains on liquidity and capital for banks.

Moody’s analysts, Jill Cetina and Ana Arsov, stated in their accompanying research that many banks experienced increased pressure on profitability during the second quarter. This heightened pressure could limit their capacity to generate internal capital. These concerns arise as a mild economic downturn in the U.S. is anticipated for early 2024, potentially leading to a decline in asset quality from previously strong but unsustainable levels. Certain banks also face risks related to their commercial real estate portfolios. Earlier this year, the spotlight was cast on regional U.S. banks following the collapse of Silicon Valley Bank and Signature Bank. This event triggered a deposit run across the sector, which subsequently spread to Europe, prompting the emergency rescue of Credit Suisse by UBS. Moody’s also cautioned that banks holding substantial unrealised losses not reflected in their regulatory capital ratios might be vulnerable to abrupt market shifts or a loss of consumer confidence, particularly in a high-interest-rate environment.