Rating agency Moody's Corp. (MCO) has downgraded 10 small to mid-sized U.S. banks, citing concerns about their credit strength.
Moody’s also warned that it may issue credit downgrades for some of America’s largest lenders, warning that the sector's credit strength will likely be tested in coming months by funding risks and weakening profits.
The downgraded banks by Moody's include M&T Bank (MTB), Pinnacle Financial Partners (PNFP), and BOK Financial Corp. (BOKF).
The credit rating agency also placed six U.S. banking giants on review for potential downgrades, including Bank of New York Mellon (BK), U.S. Bancorp (USB), State Street (STT) and Truist Financial (TFC)
“Many banks' second-quarter results showed growing profitability pressures that will reduce their ability to generate internal capital,” Moody's wrote in its downgrade decision. “This comes as a mild U.S. recession is on the horizon for early 2024 and asset quality looks set to decline.”
The agency also changed its outlook to negative for major lenders such as Capital One (COF), Citizens Financial (CFG) and Fifth Third Bancorp (FITB).
The collapse of Silicon Valley Bank and Signature Bank this past spring sparked a crisis of confidence in the U.S. banking sector, leading to a run-on deposits at several regional banks despite authorities launching emergency measures to shore up the sector.
Moody's emphasized that banks with big unrealized losses that are not reflected in their regulatory capital ratios are vulnerable to the current high interest rate environment.
The downgrades come after the fastest pace of interest rate increases by the U.S. Federal Reserve in nearly 40 years, slowing demand and borrowing, especially among consumers.
A Federal Reserve survey released at the start of August showed U.S. banks reported tighter credit standards and weaker loan demand from both businesses and consumers during Q2.
Moody’s downgrade of U.S. banks comes a week after rival rating agency Fitch lowered its rating on the United States’ debt to AA+ from AAA, citing a likely fiscal deterioration over the next three years and risky debt ceiling negotiations among politicians in Washington, D.C.
Moody’s stock has risen 10% over the past 12 months to trade at $342.41 U.S. per share.
