Moody's cuts credit ratings of 10 banks and warns of more downgrades (2024)

Wall Street's main stock indexes dropped Tuesday after Moody's slashed the credit ratings of several regional US banks and warned it may also downgrade some of the nation's biggest lenders.

The move came months after a banking crisis sent shockwaves through the financial sector this spring, when the nation witnessed the three biggest US lender failures since the 2008 financial crisis.

The banking sector has since appeared to stabilize, but Moody's new ratings moves rattled investors and sent shares of the 'Big Four' US banks - JPMorgan, Bank of America, Citigroup and Wells Fargo - down between 0.56 percent and 1.9 percent on the day.

In a note explaining the ratings action, Moody's analysts cited higher interest rates from the Federal Reserve's inflation battle, as well as a looming 'mild recession' and 'growing profitability pressures' on banks.

In total, the ratings agency downgraded the credit ratings of 10 smaller banks, placed six more on review for downgrade, and affirmed the ratings of 11 more banks but placed them on outlook negative.

The ten banks that were downgraded, all by one notch, were:Commerce Bancshares, BOK Financial Corporation, M&T Bank Corporation, Old National Bancorp, Prosperity Bancshares, Amarillo National Bancorp Incorporated, Webster Financial Corporation, Fulton Financial Corporation, Pinnacle Financial Partners and Associated Banc-Corp.

Under review are major lendersBank of New York Mellon, US Bancorp, State Street and Truist Financial, Cullen/Frost Bankers and Northern Trust.

Moody's also assigned a negative outlook to 11 further banks, including major institutions PNC, Capital One and Citizens Financial.

Bank stocks dropped following the announcement and weighed on markets, with the Dow Jones US Bank Index losing 3.75 percent.

The Dow Jones Industrial Average fell 158.64 points, or 0.4 percent, to 35,314.49, while the S&P 500 lost 0.4 percent and the Nasdaq composite shed 0.8 percent.

Despite the move, Moody's said there is no need for panic.

'What we're doing here is recognizing some headwinds - we're not saying that the banking system is broken,' Ana Arsov, managing director of financial institutions at Moody's, told Reuters.

She said banks will find it harder to turn a profit as they contend with higher interest rates, rising funding costs and a looming recession.

Despite the downgrades, the US banking system is still among the highest rated in the world, she added.

'This is largely a profitability story - we are not raising major concerns that the system is majorly undercapitalized or underfunded,' Arsov said.

The rating changes stemmed from the likelihood that bank profits will shrink in the coming quarters, Arsov said. Moody's is forecasting a recession, and if the economy worsens, more borrowers will fall behind on loan payments and eventually default.

But Arsov said credit performance has been 'stellar' in recent years, so 'we only can go up in credit costs from here' in areas such as consumer loans and commercial real estate.

Bank profits could come under pressure as they are forced to pay higher interest rates to customers to retain deposits.

Mid-size US banks were thrust into the spotlight in March after the collapse of Silicon Valley Bankand Signature Bank triggered a run on deposits across the sector.

In May,First Republic Bank became the second largest bank failure in US history, with assets of $212 million, eclipsing the failure of Silicon Valley Bank and second only to the collapse of Washington Mutual in 2008.

A sell off in regional bank shares put financial stocks at the bottom of the S&P 500 index, which also fell by around 0.9 percent, while the Dow Jones index also slid by more than 250 points, or around 0.8 percent.

Shares in big US banks, such as Bank of America, JPMorgan Chase and Citigroup also fell - despite not being under Moody's review.

Shares of M&T Bank, Pinnacle Financial Partners and Commerce Bancshares, which were among the banks downgraded a single notch by Moody's, were all down two or more percent in morning trading.

When announcing its downgrade of 10 banks, Moody's said that the Federal Reserve's fight against inflation with higher interest rates'continues to have a material impact on the US banking system's funding and its economic capital.'

It warned that higher rates have continued to decrease the value of assets owned by mid-size regional banks, leaving them exposed to drops in share prices if investors get spooked.

Deposits, which have been a pressure point for banks since the collapse of Silicon Valley Bank earlier this year, are also expected to decline further as high rates cause customers to look elsewhere for higher-yield options.

'Although the general drain on deposit funding caused by quantitative tightening moderated in the second quarter, there remains a significant risk that systemwide deposits will resume their decline in coming quarters,' Moody's said.

However, some analysts remained positive - urging customers to remain calm.

'Our view on the broader sector still remains constructive,' Georgios Leontaris, from HSBC Global Private Banking and Wealth, told Reuters.'In recent weeks, we have upgraded our view on U.S. banks to a neutral positive.'

Moody's move comes after ratings agency Fitchdowngraded the US government's credit ratingearlier this month - bringing it down a notch from the top AAA grade to AA+.

The surprise move came just two months after the agency warned the rating was under threat as lawmakersbattled over raising the nation's debt limit- before averting what would have been a first-ever default.

In a statement, the rating agency said: 'In Fitch's view, there has been a steady deterioration in standards of governance over the last 20 years.' It justified the downgrade by arguing the country's finances will likely decline in the face of a growing debt burden and political turmoil.

Following the news, Secretary of the Treasury Janet Yellenpushed back, calling the downgrade 'arbitrary' and 'outdated.'

While Wall Street opened lower on August 2 following the news - with the Dow Jones index falling more than 100 points - experts urged calm, claiming a long-term impact is likely to be mild.