Aug 22 (Reuters) – Several US banks fell on Tuesday, a day after ratings agency Standard & Poor’s Global followed Moody’s in downgrading some regional banks with significant exposure to commercial real estate.
S&P’s action would make borrowing more expensive for the banking sector as it aims to recover from a crisis earlier this year, when three regional banks failed, triggering wider turmoil in the industry.
“Some structural aspects of banks, in terms of their balance sheet, remain risks for banks as the Fed continues to try to stabilize inflation at higher rates for a longer period,” said David Wagner, portfolio manager at Aptus Capital Advisors.
On Monday, Standard & Poor’s downgraded the ratings of Associated Bank Corp. (ASB.N) and Valley National Bancorp (VLY.O) due to funding risks and increased reliance on intermediary deposits.
It also downgraded UMB Financial Corp (UMBF.O) and Comerica Bank (CMA.N) due to deposit outflows and higher interest rates. The ratings agency also downgraded KeyCorp (KEY.N) on the back of constrained profitability.
The rating process affected the stocks of major banks, although Standard & Poor’s did not mention them. JPMorgan Chase (JPM.N) and Bank of America (BAC.N) were down nearly 2%.
Citigroup (CN), Wells Fargo (WFC.N), Goldman Sachs (GS.N), and Morgan Stanley (MS.N) fell about 1%.
KeyCorp, Comerica and Associated Banc-Corp fell more than 3%, while Valley National and UMB Financial fell between 2% and 4%.
And while Wagner was “surprised” that banks posted better-than-expected loan growth in the second quarter, he still expects lenders’ problems to persist.
Standard & Poor’s also cut its outlook for S&T Bank and River City Bank to “negative” from “stable,” citing higher exposure to CRE.
The cost of insuring against default in US banks has also gone up. Data from S&P Global Market Intelligence showed that five-year credit default swaps for Goldman Sachs rose on Tuesday to 78 basis points, from 77 basis points at Monday’s close, to their highest level in a month.
S&P’s action came weeks after similar downgrades by peer Moody’s, which cut the ratings of 10 US banks and warned of possible downgrades for several major lenders.
The US Federal Reserve’s rate hikes have raised costs for banks, which must now pay more interest on deposits to prevent customers from looking for higher-yielding alternatives.
“These cuts mainly focus on liquidity concerns that have now been raised by multiple agencies where banks have so many loan portfolios they are only drawing 2.5-4.5% of interest income while now needing to pay 4.5-5.5% to depositors in savings and money market accounts,” Brian said. Mulberry, client portfolio manager at Zacks Investment Management.
He added that there were no immediate systemic risks to the banking sector despite the pressures highlighted by the downgrades.
An analyst at Fitch, the last of the big three rating agencies, told CNBC last week that several US banks, including JPMorgan Chase (JPM.N), could see ratings downgrades if the “operating environment” in the sector deteriorates further. .
(Reporting by Gokul Picharody and Naikate Nishant in Bengaluru, Nupur Anand and Saeed Azhar in New York, Michelle Price in Washington and Dara Ranasinghe in London – Reporting by Muhammad for The Arabic Bulletin – Editing by Muhammad Alyamani) (Reporting by Akanksha Khushi) Editing by Varun Hong Kong, Pooja Desai and Lanan Nguyen , Anil de Silva, and David Gregorio
Our standards: Thomson Reuters Trust Principles.
“Infuriatingly humble alcohol fanatic. Unapologetic beer practitioner. Analyst.”