On Tuesday, Moody’s reduced the credit ratings of ten regional American banks while threatening to downgrade many other bigger banks.
The ten banks targeted by Moody’s included Amarillo National Bancorp, BOK Financial, Commerce Bancshares, Fulton Financial, M&T Bank, Old National Bancorp, Pinnacle Financial Partners, Prosperity Bancshares, and Webster Financial. Shares of the major banks JPMorgan, Bank of America, Citigroup and Wells Fargo plunged as a result.
Moody’s Investors Service revealed it would review the ratings of six other institutions, including Bank of New York Mellon, Northern Trust, State Street, and US Bancorp. In addition, Moody’s assigned a negative outlook to 11 other banks, The Wall Street Journal reported. The Dow Jones Industrial average plunged 3.75%.
“Many banks’ second-quarter results showed growing profitability pressures that will reduce their ability to generate internal capital,” Moody’s said. “This comes as a mild U.S. recession is on the horizon for early 2024 and asset quality looks set to decline, with particular risks in some banks’ commercial real estate (CRE)portfolios.”
“U.S. banks’ Q2 earnings showed material increases in funding costs as well as profitability pressures related to the significant and rapid tightening in monetary policy and inverted yield curve, which will continue to lower profitability and implies a weaker ability to generate capital internally,” Moody’s analysts added.
“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, stated. “This is largely a profitability story — we are not raising major concerns that the system is majorly undercapitalized or underfunded.”
The net interest margins of bank, which are the difference between interest the banks earn on loans and the interest depositors earn, have been affected because of the release of non-interest bearing deposits that were triggered by the 2023 financial situation, Investopedia noted, adding that most banks are troubled by high loan-to-deposit ratios, which could leave them vulnerable to insufficient liquidity.
In May, First Republic Bank failed, the biggest bank to fail since Washington Mutual in 2008, which was the largest bank failure in U.S. history.