6 Regional Banks' Ratings on Review for Downgrade by Moody's

Commercial real estate ("CRE") continues to be an area of concern amid the high-interest-rate environment. Because of their significant exposure to CRE loans, the long-term ratings of at least six regional banks in the United States have been placed under review for downgrade by Moody's Corporation MCO.
The banks are Old National Bancorp ONB, Fulton Financial Corporation FULT, F.N.B. Corporation FNB, WaFd, Inc. WAFD, First Merchants Corp. FRME and Peapack-Gladstone Financial Corp PGC.
Notably, at the time when interest rates were low in the United States, various regional banks increased their concentrations in CRE, which, by nature, is a volatile asset class.
Now, amid the higher interest rate environment (the Federal Reserve increased interest rates last year at the fastest pace in decades to contain the stubborn inflation, which slowed down credit demand), banks with a substantial concentration in CRE loans face ongoing credit quality and profitability issues. This is because higher rates have increased the longstanding risks of CRE for banks' creditworthiness, particularly during cycle downturns.
Moreover, unlike the largest regional banks, the above-mentioned banks are not subject to heightened prudential regulatory standards. Thus, these banks' credit weaknesses are enlarged by lower regulatory requirements in relation to the larger banks.
Accordingly, since CRE loans have a lower value now amid higher rates, these banks face heightened risks.
According to Moody's, bank funding is under pressure now because depositors continue to switch to accounts with higher interest rates, which has been leading to a compression in banks' net interest margins.
Moody's said that its review for downgrade will focus on the extent to which the above-mentioned regional banks can maintain sufficient qualitative and quantitative risk mitigants to offset the dangers associated with their CRE loan exposures, especially with respect to their policy toward the amount of capital and liquidity that they retain.
Particularly for FULT, Moody's will also consider the impact that the recent acquisition of Republic Bank will have on the bank's creditworthiness.
Likewise, for WAFD, Moody's will consider the impact that the bank's loan sale (WAFD recently entered an agreement to sell a large pool of multi-family loans that it acquired as part of its acquisition of Luther Burbank) will have on its capital, liquidity and profitability profiles.
Currently, WAFD, ONB, and FULT carry a Zacks Rank #3 (Hold). FNB carries a Zacks Rank #4 (Sell).
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