KeyCorp, Comerica Inc., Valley National Bancorp, UMB Financial Corp., and Associated Banc-Corp all had their grades downgraded by one notch by S&P, according to a statement released on Monday. This was due to the industry-wide effects of increased interest rates and deposit movements.
Additionally, S&P downgraded the ratings of River City Bank, S&T Bank, and Zions Bancorp to negative from neutral after conducting the study.
Numerous depositors have “shifted their funds into higher-interest-bearing accounts, increasing banks’ funding costs,” according to a note from S&P summarising the changes. “The value of their securities, which make up a large portion of their liquidity, has fallen while the decline in deposits has squeezed liquidity for many banks.”
As part of an extensive investigation into the rising pressures on the sector, Moody’s earlier this month cut credit ratings for 10 US banks and issued a warning that it may downgrade others.
Since the collapse of three regional banks in March, which started a wider selloff, the KBW Bank Index of big US banks has fallen roughly 7%, on track to have its worst monthly performance.
US Bank Shares Fall as Moody’s Lowers Ratings and Warns of Risks
Numerous small and midsize banks are feeling the pressure from a wave of Federal Reserve interest rate increases after paying customers little for years to draw deposits that financed loans and other assets on their balance sheets. Businesses and consumers now have more options for finding other places to earn higher returns. According to S&P, this has caused non-interest bearing deposits to decrease by 23% over the last five quarters.
Banks can either reduce their balance sheets by selling assets produced in a lower-rate environment and locking in losses on those that have decreased in value, or they can replace the cash that is leaving the building with more expensive forms of funding, such brokered deposits.
In either case, it reduces revenue.
‘Hot Money’ Scorches Regional Bank Profits as Deposits Flee
More banks are likely to merge in transactions aimed at bolstering their finances as a result of these pressures. In order to manage the turbulence, regional lender PacWest Bancorp, based in Beverly Hills, agreed to sell itself to smaller rival Banc of California in July. PacWest Bancorp has been selling assets to increase liquidity.
At the halfway point of the year, S&P reported that federally insured banks had more than $550 billion in unrealized losses on their securities that were available for sale and held until maturity.
Looking ahead, if the Fed keeps rates high for longer than expected, the situation may get worse for banks, substantially depreciating the value of loans to borrowers who need to refinance.
While many asset quality indicators continue to appear favourable, increasing rates are putting pressure on borrowers, according to S&P. The largest strains may be felt by banks with significant exposures to commercial real estate, particularly in office lending.
Abhishek Vishnoi provided aid.