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Ten banks faced credit rating downgrades from Moody’s this morning, along with six more prominent depositories being put on watch for potential downgrades in their own future. Several more now face a “negative” outlook. These warnings from a big three credit rating agency are spiking fears that US banks’ balance sheets have not meaningfully recovered from the damage they took in the wake of an aggressive phase of monetary tightening throughout the past year. Indeed, deposits have remained very subdued in the wake of several major bank failures earlier this year, and concerns are rising that a glut of unrealized losses could soon be compounded by asset degradation. 

Banks have relied heavily on expensive borrowing from Fed’s Bank Term Funding Program (BTFP), as well as advances from Federal Home Loan Banks (FHLB), to fill the void of lost deposits and maintain adequate liquidity. Though dependence on FHLBs has fallen, rising demand for funds from the BTFP has offset some of that decline.

Related ETFs: SPDR S&P Bank ETF (KBE), SPDR S&P Regional Banking ETF (KRE)

Big three ratings agency Moody’s just cut the credit ratings of 10 small and mid-sized US banks and, perhaps more worryingly, put six more prominent banks on review for a potential downgrade in the future. The largest and most recognizable name on the list of downgraded banks was M&T Bank, which had over $200 billion in consolidated assets at the end of Q1. The other nine banks were composed of several other recognizable names, including Pinnacle Financial Partners, Prosperity Bank, Old National Bank, and Webster Financial, ranging in size from about $8.5 billion to $74.8 billion. Only three of the downgraded banks ended up with a “negative” outlook from Moody’s, however, as the other seven remained “stable”.

The list of banks that could soon face the same fate was much more high profile, with Truist Financial, Bank of New York Mellon, Northern Trust, State Street, Frost Bank, and US Bancorp all put on review for downgrade. Truist is the sixth-largest US bank by assets at $564.8 billion and alone accounts for almost the same amount of assets as the ten downgraded banks combined. Several other banks, including Ally Financial, Fifth Third Bancorp, and PNC, had their outlook shifted to “negative”.

In a note, Moody’s cited banks’ Q2 results showing “growing profitability pressures that will reduce their ability to generate internal capital.” The agency added that they still forecast a “mild US recession” on the horizon for early 2024, coinciding with an expected decline in asset quality, and particular risks facing some banks’ commercial real estate (CRE) portfolios. These warnings are significant, as the banking sector has shown few signs of a recovery in deposit levels, leaving their profit growth subdued and balance sheets at risk. Since peaking in April 2022, the US banking sector saw…

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