Investing

Morning Blast: Moody's Weighs in on US Banks; Lucid Defies Reality

Paul Ausick

Published: August 8, 2023 7:35 am

Last Updated: August 8, 2023 7:36 am

In a sweeping review of U.S. banks and financial institutions, Moody’s Investors Service on Monday lowered credit ratings for 10 small and midsize firms and warned that it may downgrade several larger banks.

Among the large banks, Moody’s issued ratings reviews for possible downgrades on a number of banks and financial institutions, including Bank of New York Mellon Corp. (NYSE: BK), State Street Corp. (NYSE: STT), U.S. Bancorp (NYSE: USB), Truist Financial Corp. (NYSE: TFC) and Northern Trust Corp. (NASDAQ: NTRS). Others, including Regions Financial Corp. (NYSE: RF), Bank OZK (NASDAQ: OZK) and Fifth Third Bancorp (NASDAQ: FITB), had their ratings affirmed but Moody’s changed its outlook on the firms from stable to negative. A total of 11 lenders saw their outlook drop to negative.

Pinnacle Financial Partners Inc. (NASDAQ: PNFP), M&T Bank Corp. (NYSE: MTB) and Old National Bancorp (NASDAQ: ONB) were among lenders whose ratings were cut.

In its reviews for downgrades, Moody’s said that the “rating action reflects the ongoing strain in the US banking sector, including increased funding pressures and potential regulatory capital weaknesses.” The banks’ own earnings reports provided more ammo for the reviews:

US banks’ Q2 earnings showed material increases in funding costs as well as profitability pressures related to the significant and rapid tightening in monetary policy and inverted Treasury curve, which will continue to lower profitability and implies a weaker ability to generate capital internally. Higher interest rates continue to reduce the value of US banks’ fixed rate securities and loans and interest rate risk is not captured well in US bank regulation and thus can create liquidity risks.

Bank stocks were trading lower in Tuesday’s premarket session. Truist traded down about 1.8%, State Street traded down 1.2% and Bank of New York Mellon was trading about 2.3% lower than Monday’s closing price.

After U.S. markets closed Monday, electric vehicle (EV) maker Lucid Group Inc. (NASDAQ: LCID) reported second-quarter earnings that fell short of estimates on both the top and bottom lines. Yet, the stock traded up more than 2% in Tuesday’s premarket.

The bad financial news was more than offset (in investors’ minds, at least) by the company’s affirmation of its plan to produce more than 10,000 EVs this year. Lucid has sold just 2,810 cars in the first six months of the year (1,404 in the second quarter) and produced 4,487. So, it is possible that the company can produce an additional 1,100 cars in the second half of the year to bring total production to the 10,000 unit target.

At the beginning of the year, analysts expected Lucid to produce about 20,000. A loose definition of “about” seems to be in force, however. And that likely is due to the largesse of the company’s biggest investor, the Saudi Arabian Public Investment Fund (PIF), and its 61% stake in Lucid.

In the second quarter, the company reported a loss from operations of $847.7 million and a net loss of $764.2 million. Simple math says every Lucid vehicle sold in the quarter added more than $500,000 to the company’s net loss.

Thanks to the Saudis, Lucid’s balance sheet looks much better. The company has $6.25 billion in current assets, including about $5.25 billion in cash, cash equivalents and short-term investments. Most of the rest ($850 million) rests in the parking lot as unsold inventory.

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In an effort to sell that inventory, the company announced price cuts on its Lucid Air models: $5,000 on the Air Pure, from $87,400 to $82,400; $12,400 on the Air Touring, from $107,400 to $95,000; and $28,400 on the Air Grand Touring, from $154,000 to $125,600. The low prices are good through the end of August.

Lucid raised $3 billion in fresh capital from the PIF during the second quarter, giving the company enough capital to keep it afloat into 2025, according to CFO Sherry House. That is roughly six more quarters at the company’s current cash burn rate of $1 billion every three months. When the PIF decides it would be a better investment to buy more big-time soccer teams, Lucid could be in real trouble.