Moody’s downgraded the credit ratings of 10 small to mid-sized U.S. banks by one notch on Monday. The agency also placed six major banking giants, including Bank of New York Mellon, US Bancorp, State Street and Truist Financial, on review for potential downgrades.
In its note, Moody’s stated that many banks’ second-quarter results revealed increasing profit pressures that will reduce their capacity to generate internal capital. This comes as a mild recession in the U.S. looms early in 2024 and asset quality appears poised to decline, with specific risks in some banks’ commercial real estate portfolios.
Moody’s said high interest rates, decreases in office demand due to remote work, and a reduction in available commercial real estate credit are key risks due to elevated commercial real estate exposures.
The agency also altered its outlook to negative for eleven major lenders, such as Capital One, Citizens Financial and Fifth Third Bancorp.
The collapse of Silicon Valley Bank and Signature Bank earlier this year prompted a crisis of confidence in the U.S. banking industry, resulting in a run on deposits at various regional banks despite authorities launching emergency measures to reinforce confidence.
However, Moody’s warned that banks with substantial unrealized losses not reflected in their regulatory capital ratios are at risk of losing confidence in the current high interest rate climate.
The extensive report comes as tightening monetary conditions after the quickest pace of interest rate hikes by the Federal Reserve in decades slows demand and borrowing.
The higher rates have also raised the possibility of a recession and put pressure on sectors like real estate to adapt to post-pandemic realities.
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