More US Banks Face Credit Rating Downgrades as Funding and Deposit Concerns Persist

Another round of credit rating downgrades impacting several US banks with a combined $426 billion in consolidated assets, this time from S&P Global Ratings, has compounded a similar move by Moody’s earlier this month. Concerns regarding deposits and funding continue to loom over US depositories who cannot seem to break free of borrowing from the Fed and other expensive sources of liquidity. 

In some of its press releases, S&P cited continual contractions in net interest margins (NIM), which have now declined across the US banking industry for two straight quarters. Though long-term rates have finally started rising more quickly than short-term rates, steepening the yield curve, deposits have shown little sign of coming back to banks. Meanwhile, the sum of assets deposited into market funds are still rising gradually alongside interest rates. 

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

Last night, S&P Global Ratings downgraded five US banks by one notch and cut its outlook for two more. Those adjustments follow a similar move by fellow big-three ratings agency Moody’s, which MRP covered in detail earlier this month. The largest and most recognizable name on the list of downgraded banks was KeyCorp, the bank holding company and parent to KeyBank, which controlled nearly $192.8 billion in consolidated assets at the end of Q2. The other four banks were composed of several other recognizable regional banks, including Comerica Inc., Valley National Bancorp, UMB Financial Corp. and Associated Banc-Corp, ranging in size from about $40.1 billion to $90.9 billion. The sum of these banks’ assets was equivalent to roughly $426.7 billion – a smaller total than the more than $560.0 billion held by the banks that Moody’s downgraded. Only one bank, Associated Banc-Corp, was downgraded by both agencies.

The two banks hit with diminished outlooks last night, S&T Bank and River City Bank, were significantly smaller than the downgraded depositories, with each carrying less than $10.0 billion in consolidated assets. However, S&P Global did re-affirm a negative outlook for Zions Bancorp, which is only slightly smaller than Comerica at $87.2 billion in assets. S&P’s press release on Zions cites a “reliance on higher-cost funding has led to a meaningful decline in net interest margins (NIMs)”, which is exactly the kind of pressure MRP has repeatedly cited as a potential curb on banks’ financial performance. In regard to KeyCorp’s downgrade, S&P wrote that Key’s NIM contracted by 35bps sequentially, to 2.12% in the second quarter of 2023, due to higher funding costs. That followed a 26bps decline in the first quarter. Though that is particularly steep decline, KeyCorp is not alone in…