Moody's Investor Service's downgrading of credit ratings at several large U.S. banks could make services like insurance and products including credit default swaps more expensive for affected institutions, analysts said Wednesday.
The credit rating firm on Tuesday
The ratings downgrades are the latest obstacle for a banking industry trying to adjust to a barrage of difficult operating conditions, including declining deposits, higher interest rates and worsening asset quality. Lower credit ratings could make it more costly for downgraded banks to buy credit default swaps and insurance.
"When your rating goes down, that gets factored into a lot of things," said Chris Whalen, chairman of the financial consulting firm Whalen Global Advisors. "Most of these banks are already paying more for money."
Even banks with unchanged ratings could face increased scrutiny from investors and customers, two groups that have been on alert for signs of banks' resilience since the spring's
The bank downgrades by Moody's come a week after Fitch Ratings, another credit-rating firm,
"When the sovereign goes down … ratings that depend on it go down," Whalen said.
Moody's cited higher funding costs paid by banks, a potential decline in capital and deteriorating asset quality in the commercial real estate industry as reasons for downgrading the ratings of select banks and placing others under review.
"Many banks' Q2 results showed growing profitability pressures that will reduce their ability to generate internal capital," Moody's analysts Ana Arsov and Jill Centina wrote in their analysis.
Moody's downgraded ratings on Commerce Bancshares, BOK Financial, M&T Bank, Old National, Prosperity Bancshares, Amarillo National, Webster Financial, Fulton Financial, Pinnacle Financial Partners and Associated Banc-Corp.
The firm said it would place the credit ratings of six banks under review: Bank of New York Mellon, NorthPern Trust, State Street, Cullen/Frost Bankers, Truist Financial and U.S. Bancorp.
Moody's also changed its outlook to negative for the following regional banks: PNC Financial Services Group, Capital One Financial, Citizens Financial Group, Fifth Third Bancorp, Huntington Bancshares, Regions Financial, Cadence Bank, F.N.B., Simmons First National, Ally Financial and Bank OZK.
"The issues driving last night's actions aren't necessarily news to bank stock investors," Autonomous Research analysts wrote in a note.
Moody's cited M&T's "elevated exposure to CRE loans" as a reason for downgrading the bank. Commercial real estate loans made up about 26% of the bank's portfolio, above that of its peers.
"Moody's believes small and mid-size banks that have greater exposures to commercial real estate lending, especially construction and office lending, face higher risks because of high interest rates, a significant slowdown in U.S. economic growth and reduced demand for office space," the Moody's analysts wrote.
Banks this year have
At the same time, Moody's said it expected M&T's "favorable financial performance" would continue despite the noted headwinds. M&T declined to comment on its downgrade.
Still, bank stocks fell sharply on Wednesday before recovering most of their losses. The KBW Nasdaq Banking Index lost 3.5% in early trading. Shares of regional banks saw some of the largest initial drops, with M&T Bank down more than 5% in morning trading.
The
"The ones who are better at this, who understand duration and understand how to get this right, are going to do much better, though they're going to see it in their stock price," he said.
