Two weeks after Moody’s Investors Service rattled financial stocks by cutting the ratings for a slew of US banks, S&P Global Ratings is downgrading and dimming its outlook for several more — citing a similar mix of pressures making life “tough” for lenders.
S&P lowered grades one notch for KeyCorp, Comerica Inc., Valley National Bancorp, UMB Financial Corp. and Associated Banc-Corp, it said Monday in a statement, noting the impact of higher interest rates and deposit moves across the industry.
S&P also lowered its outlook for River City Bank and S&T Bank to negative and said its view of Zions Bancorp remains negative after the review.
Many depositors have “shifted their funds into higher-interest-bearing accounts, increasing banks’ funding costs,” S&P wrote in a note summarizing the moves. “The decline in deposits has squeezed liquidity for many banks while the value of their securities — which make up a large part of their liquidity — has fallen.”
Moody’s lowered credit ratings for 10 US banks earlier this month and warned it may downgrade others as part of a sweeping look at mounting pressures on the industry.
The KBW Bank Index of major US banks has since slumped almost 7% — heading for its worst monthly performance since the collapse of three regional banks in March sparked a broad selloff.
Read more: US Bank Shares Drop as Moody’s Cuts Ratings, Warns on Risks
A spree of Federal Reserve interest-rate hikes is squeezing many small and midsize banks that for years paid little to attract customer deposits that fund loans and other assets on their balance sheets. Consumers and businesses now have more opportunities to earn higher returns elsewhere. That’s prompted non-interest-bearing deposits to fall 23% in the past five quarters, according to S&P.
As cash walks out the door, banks can either replace it with more expensive forms of funding, such as brokered deposits, or shrink their balance sheets by selling assets created in a lower-rate environment — locking in losses on those that have declined in value.
Either way, it bites into earnings.
Read a Big Take: ‘Hot Money’ Scorches Regional Bank Profits as Deposits Flee
Those pressures are widely expected to push more banks to combine in deals designed to shore up their finances. In July, Beverly Hills-based regional lender PacWest Bancorp, which had been shedding assets to bolster liquidity, agreed to sell itself to smaller rival Banc of California to help navigate the turmoil.
Federally insured banks were sitting on more than $550 billion in unrealized losses on their available-for-sale and held-to-maturity securities as of mid-year, S&P said.
Looking ahead, the situation may worsen for banks if the Fed holds rates high for longer than previously anticipated — further eroding the value of loans to borrowers who need to refinance.
“While many measures of asset quality still look benign, higher rates are pressuring borrowers,” S&P wrote. “Banks with material exposures to commercial real estate, especially in office loans, could see some of the greatest strains.”
(Updates with background on higher funding costs, lower asset values from seventh paragraph.)
