Moody’s Signals Potential Credit Downgrades for Six Major US Banks

Moody's, a renowned credit ratings agency, has initiated a review of the credit ratings for six prominent US banks, which includes Bank of New York Mellon, State Street, and Northern Trust. The motive behind this move is to evaluate the possibility of potential downgrades amidst ongoing challenges in the US banking sector.

Announced on Monday, Moody's decision comes as the industry faces a spectrum of strains, encompassing mounting funding pressures and perceived vulnerabilities in the banks' capital adequacy.

In response to this development, US stock futures experienced a dip, projecting a downward opening for the Dow by 250 points (0.7%). Similarly, S&P 500 futures indicated a 0.7% drop, while Nasdaq futures showed a decline of 0.8%.

The earlier part of this year saw the US banking landscape rocked by the abrupt collapses of Silicon Valley Bank, Signature Bank, and First Republic.

Moody's scrutiny extended to three other significant banks—Truist (TFC), Cullen Frost, and U.S. Bancorp (USB). Similar factors were cited for these institutions, with a specific mention of "rising risks associated with commercial real estate exposures."

The prevailing trend of remote work has placed downward pressure on the value of US office spaces, heightening concerns about potential losses for banks heavily invested in commercial real estate ventures. This situation particularly impacts regional and community banks, which exhibit heightened exposure to these types of loans.

Moody's underscored the relative vulnerability of most regional banks due to their comparably lower regulatory capital in comparison to larger US banks and global counterparts.

Furthermore, the second-quarter earnings reports from US banks reflected notable spikes in funding costs and profitability challenges. These issues are, in part, attributed to the series of abrupt interest rate hikes within the United States.

Apart from the six major banks, Moody's also undertook downgrades for ten smaller US banks, which included Commerce Bancshares (CBSH), BOK Financial Corporation, and M&T Bank Corporation. This move was prompted by various factors, notably the escalating risk associated with declining asset values. This risk is especially pertinent for smaller and mid-sized banks with substantial exposure to the commercial real estate sector.

Also Read: Understanding Credit Rating Agencies: Exploring Fitch, Moody's, and S&P for Smart Investments