US Banking Sector Shaken: Moody's Drops Credit Ratings Of 10 Banks, Sounds Alarm For More Downgrades

Moody’s, the well-known credit rating organization, downgraded the ratings of 10 U.S. small and mid-sized banks by one notch late Monday, sending shockwaves across a sector still reeling from the collapse of regional banks in March.

The banks affected by the downgrades includes M&T Bank Corp. MTB, Webster Financial Corp. WBS, BOK Financial Corp. BOKF, Old National Bancorp ONB, Pinnacle Financial Partners Inc. PNFP, and Fulton Financial Corp. FULT.

Moody’s action comes amid worries about rising financing costs, possible weaknesses in regulatory capital, and escalating risks linked with commercial real estate lending. These concerns are heightened by the declining demand for office space.

“Although the general drain on deposit funding caused by quantitative tightening (QT) moderated in Q2, there remains a significant risk that systemwide deposits will resume their decline in the coming quarters,” Moody’s stated in the report.

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In addition to the downgrades, the rating agency has also announced the following actions:

• Northern Trust Co. NTRS and Cullen/Frost Bankers Inc. CFR are now under meticulous scrutiny for potential credit downgrades.
• Moody’s has initiated a comprehensive evaluation of six major banking giants, including Bank of New York Mellon BK, US Bancorp USB, State Street STT, and Truist Financial TFC. This review could potentially lead to additional credit downgrades.
• Moody's has also adopted a “negative” outlook on eleven lenders, encompassing names such as PNC Financial Services Group PNC, Capital One Financial Corp. COF, Citizens Financial Group Inc. CFG, Fifth Third Bancorp FITB, Regions Financial Corp. RF, Ally Financial Inc. ALLY, Bank OZK OZK, and Huntington Bancshares Inc. HBAN.

Market Reactions: US Banks Poised To Sell Off on Tuesday

Premarket trading on Tuesday saw drops in shares of U.S. banks in reaction to this news.

Meanwhile, the Italian government announced an unexpected 40% tax on additional profits for banks, as well as weaker-than-expected trade figures for China, adding to the general risk-averse feeling among investors.

Major banks which include JP Morgan Chase & Co. JPM, Bank of America Corp. BAC, Morgan Stanley MS, Wells Fargo & Co. WFC, Goldman Sachs GS and Citigroup C, all sit in the red ahead of the market open on Tuesday.

Among the components of the KBW Bank Index, tracked by the Invesco KBW Bank ETF KBWB, Comerica Inc. CMA, Western Alliance Bancorporation WAL and Zions Bancorporation ZION were the worst performers in the premarket trading, shedding 4.2%, 3.9% and 3.5% respectively.

Read more: Borrowing Bonanza: US Households Embrace Credit Even As Interest Rates Reach 20-Year Peaks

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