Two weeks after the shock caused by Moody’s Investors Service in the financial markets by lowering the credit ratings of a large number of American banks, S&P Global Ratings announced a downgrade of its rating, as well as its expectations for a number of banks, citing a mixture of pressures imposed “Difficulties” in the face of banks.
S&P Global downgraded by one notch its ratings on Kay Corp, Comerca, Valley National Bancorp, UMB Financial and Associated Bancorp, it said in a statement. It highlighted the impact of rising interest rates and bank deposit movements across the sector.
S&P also downgraded its outlook on both River City Bank and S&T Bank to negative, further noting that its outlook on Zinos Bancorp remained negative after the revision.
S&P indicated that federally insured banks incurred unrealized losses on available-for-sale and held-to-maturity securities as of the middle of the current year in excess of $550 billion.
S&P said in a note to clients summarizing the ratings amendments: “Many depositors moved their money to higher interest-bearing accounts, which exacerbated banks’ financing costs, while the decline in the volume of deposits reduced the liquidity of many banks, while the value of their holdings of securities declined.” Finance, which represents a large amount of its financial liquidity.
The cycle of interest rate hikes by the US Federal Reserve is putting pressure on many banks, small and medium, that have been paying negligible costs for years to attract customer deposits that finance loans and other assets on their balance sheets. Consumers and businesses now have more opportunities to earn higher returns in other sectors. As a result, interest-free deposits have fallen by 23% over the past five quarters, according to S&P.
a future vision
In terms of the outlook, the position of banks may deteriorate if the US Federal Reserve keeps interest rates high for longer than previously expected, which exacerbates the erosion of the value of loans for borrowers in need of refinancing.
S&P concluded its statement: “While many measures of asset quality are still in good shape, higher interest rates are putting pressure on borrowers, and banks with significant exposure to commercial real estate, particularly office space loans, could be subject to a tremendous amount of pressure.” ».
With the outflow of cash deposits, banks can either compensate them with higher-cost forms of financing, such as deposits provided by intermediaries, or shrink their balance sheets by selling assets they acquired in a low interest rate environment, which means accepting losses from those assets that have depreciated in value. . In either case, profits fell.
These pressures are expected to push more banks to merge through deals designed to support their financial resources. Last July, the Beverly Hills-based regional bank Backwest Bancorp, which had been selling assets to increase its cash flow, agreed to a buyout deal offered by its smaller rival, Bank of California, to help it navigate the chaos.
Moody’s had downgraded the credit ratings of 10 US banks earlier this month, warning of the possibility of downgrading the ratings of other banks as part of a comprehensive look at the mounting pressures facing the sector. Since then, the KBW index of major US banks has fallen by nearly 7%, heading towards recording the worst monthly performance since the collapse of 3 regional banks last March, which led to a broad sell-off of the sector’s stocks.