FameEX Hot Topics | S&P Lowers Ratings for Five Regional US Banks Amid Challenging Banking Environment

S&P Global Ratings has taken a significant step by downgrading the ratings of five regional banks in the United States. This decision sheds light on the challenging operating environment that has been casting a shadow over the sector since the start of the year. The banks that have felt the impact of these downgrades are Associated Banc Corp., Comerica Inc., KeyCorp, UMB Financial Corp., and Valley National Bancorp. Additionally, the outlook for two other regional banks has been revised downward to negative. The downgrade of these five regional banks underscores the difficulties that regional institutions have been grappling with in 2023, particularly following the dramatic collapse of Silicon Valley Bank (SVB) in March. The aftermath of SVB's collapse led to a wave of deposit withdrawals as customers rushed to move their funds to larger, more stable banks. This sudden shift has resulted in significant funding challenges for many of the affected regional banks.

S&P's statement on the matter highlighted the adverse consequences of the combination of rising interest rates and quantitative tightening measures that have been in play since March 2022 as countermeasures against elevated inflation. These measures have placed a considerable burden on a number of U.S. banks, affecting their funding sources, liquidity levels, and income spreads. Consequently, the value of bank assets has been on the decline, intensifying the risk of a deterioration in the quality of these assets. Regional banks are currently locked in a fierce competition with larger national banks as they strive to hold onto their deposits, a struggle that has led to a noticeable dent in their profitability. To illustrate, S&P pointed out that Comerica faced a significant annual drop of $14 billion in average deposits. Adding to the challenges, the evolving landscape of remote work has introduced uncertainties regarding the necessity of traditional office spaces. This has further fueled concerns about regional banks' vulnerability to fluctuations in the commercial real estate sector.

In a parallel development, Moody's recently downgraded the ratings of 10 regional banks earlier in the same month. This succession of downgrades underscores the growing discrepancy between major national banks and their smaller regional counterparts. While larger banks have showcased resilience following the Silicon Valley Bank collapse, regional banks continue to wrestle with ongoing challenges. Though the majority of banks analyzed by S&P still maintain stable outlooks, the proportion facing negative forecasts has now risen to 10%. The potential for a deterioration in asset quality is growing, as highlighted by the credit agency. Given the backdrop of witnessing some of the most significant U.S. bank failures in history this year, S&P suggests that regional banks should bolster their liquidity and capital reserves in order to navigate these "challenging operating conditions."

Supporting this downgrade, the U.S. Federal Deposit Insurance Corporation (FDIC) recently emphasized the risks facing the banking sector in 2023. The recent closure of Tri-State Bank by the FDIC in July serves as yet another poignant example of a U.S. bank's downfall. These developments underscore the imperative for regional banks to adapt to the evolving financial landscape and strengthen their strategies to ensure their ongoing stability.

Disclaimer: The information provided in this section is for informational purposes only, doesn't represent any investment advice or FameEX's official view.