Bank stocks retreated Tuesday after Moody's slashed credit ratings for several small and midsize U.S. banks late Monday. The agency warned it may downgrade larger lenders as questions about profitability arise.
Moody's lowered the ratings of 10 banks by one notch on Bank of New York Mellon, U.S. Bancorp, State Street, Truist Financial, Cullen/Frost Bankers, and Northern Trust, according to reports.
The rating agency changed its outlook to negative for 11 banks, including Fifth Third Bancorp, Capital One and Citizens Financial.
Pinnacle Financial, M&T Bank, BOK Financial and Webster Financial were among smaller lenders that received official downgrades.
Bank Risks Ahead
"Many banks' Q2 results showed growing profitability pressures that will reduce their ability to generate internal capital," analysts Jill Cetina and Ana Arsov wrote in Moody's research note. "This comes as a mild U.S. recession is on the horizon for early 2024 and asset quality looks set to decline from solid but unsustainable levels."
The analysts wrote there's a particular risk for some banks' commercial real estate portfolios. Meanwhile, U.S. banks contend with interest rate and asset-liability management risks, which impact liquidity and capital.
"The wind-down of unconventional monetary policy drains systemwide deposits, and higher interest rates depress the value of fixed-rate assets," Moody's wrote.
The agency also cautioned that banks with sizable unrealized losses, which are not reflected in capital ratios, could suffer a loss of confidence in the current high-rate environment.
The Kansas City Federal Reserve noted that rising interest rates eroded the value of commercial banks' securities portfolios by 30%. That leaves the sector sitting on about $600 billion in unrealized losses for their capital holdings.
SVB Financial sparked a bank crisis in the spring after it was the first FDIC-insured financial institution to fail in 2023 due to its massive unrealized losses. Moody's marked six regional banks for potential downgrades in March in the midst of the bank panic.
Bank Stocks
Bank stocks fell Tuesday on the Moody's downgrades.
The SPDR S&P Regional Banking ETF pared losses to 1.2% after declining 3.6% in early trade.
Among larger banks, Bank of America carved 1.9% lower. JPMorgan Chase faded 0.6% Tuesday while Wells Fargo slumped 1.3%.
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