Moody’s, a financial rating agency, has recently decreased credit ratings for several small to medium-sized U.S. banks, a report by Reuters says.
The ratings organisation also signaled the possibility of downgrading some of the country’s largest banks, expressing concerns about the credit strength of the banking sector due to funding risks and decreased profitability.
The credit ratings of 10 banks were reduced by one level, and six major banks, including Bank of New York Mellon, US Bancorp, State Street, and Truist Financial, are now under review for potential downgrades.
Moody’s noted that many banks faced pressure on their profits in the second quarter of this year, which could limit their ability to generate capital. These challenges coincide with predictions of a mild economic downturn in the U.S. for early 2024, potentially leading to a decline in asset quality. Of particular concern are risks associated with some banks’ portfolios related to commercial real estate (CRE).
Elevated exposures to CRE represent a significant risk, attributed to factors like high interest rates, decreased office demand due to remote work, and reduced availability of credit for commercial real estate.
Moody’s has also shifted its outlook to negative for eleven major lenders, including Capital One, Citizens Financial, and Fifth Third Bancorp.
This assessment arrives against the backdrop of tighter monetary conditions following significant interest rate increases by the Federal Reserve. The faster pace of these increases has slowed demand and borrowing. These changes have heightened the potential for a recession and prompted adjustments in sectors like real estate.
Recent data from the Federal Reserve indicated that U.S. banks experienced tighter credit standards and weaker loan demand during the second quarter, signaling ongoing challenges in the industry. Fitch, a peer rating agency, has also downgraded the United States’ credit rating due to fiscal concerns over the next few years.
The banks that faced credit rating downgrades from Moody’s include M&T Bank, Pinnacle Financial Partners, Prosperity Bank, and BOK Financial Corp.