Moody’s downgrades US regional banks and will review six giants

Moody’s Investors Service has cut the credit ratings of 10 US regional banks and placed under review the ratings of six others.

The banks downgraded are Amarillo National, Associated Banc-Corp, BOK Financial, Commerce Bancshares, Fulton Financial, M&T Bank, Old National Bancorp, Pinnacle Financial Partners, Prosperity Bank and Webster Financial Corp.

Those placed on review for downgrade are giants: BNY Mellon, Northern Trust, State Street, Cullen/Frost Bankers, Truist Financial and US Bancorp.

It has been five months since the collapse of Silicon Valley Bank, the Bay area bank well-known for its services tailored to the venture capital industry. New York’s Signature Bank failed later the same weekend, and to some it appeared that the first dominoes in a long line may have fallen.

Broader disaster did not follow, however. In the US and several other countries, banking regulators joined to provide extraordinary liquidity to head off contagion, but actual and potential investors in banks remain jittery.

The Moody’s downgrades are a judgment on the vulnerability of balance sheets, as well as on the macro context.

In an accompanying research note, Moody’s analysts Jill Cetina and Ana Arsov said US banks in general are contending with interest rate and asset-liability management risk. The Fed’s interest rate increases have depressed the value of their fixed-rate assets. In particular, Moody’s sees commercial real estate portfolios as taking a hit in the near future.

The note also said a mild recession is “on the horizon for early 2024 and asset quality looks set to decline from solid but unsustainable levels”.

The downgrades do not appear to be closely tied to the recent round of earnings reports. Some of these banks offered good news in their Q2 reports. For example, Nashville-based Pinnacle, which serves chiefly the southeastern states, reported diluted earnings per share of $2.54, an increase of 36.6 percent from the second quarter of 2022.