A couple of weeks after Moody’s cut the ratings of 10 small-to-mid-sized institutions and placed a few big lenders under review for potential downgrades, S&P Global Ratings is cutting credit ratings and revising the outlook for several more.

Moody’s noted that rising funding costs, potential regulatory capital weakness and heightened risks associated with commercial real estate (CRE) loans on subdued office space demand were putting strain on banks’ profitability.

Per S&P, a similar mix of pressures has been testing the banking sector’s credit strength and will, thus, make survival tough for lenders.

On the grounds of funding risks and a higher reliance on brokered deposits, the ratings of Associated Banc-Corp ASB and Valley National Bancorp VLY have been downgraded by S&P.

The rating agency has also downgraded UMB Financial Corporation UMBF, Comerica Incorporated CMA and KeyCorp KEY on concerns like large deposit outflows and higher interest rate environment.

Further, S&P downgraded the outlook of S&T Bank and River City Bank to negative from stable mainly because of high CRE exposure.

In a note, S&P has said that the sharp rise in interest rates has been weighing on many U.S. banks’ funding and liquidity.

The rating agency added that deposits held by the Federal Deposit Insurance Corp (“FDIC”)-insured banks will continue to decline as long as the Federal Reserve is “quantitatively tightening.”

S&P noted that many depositors have “shifted their funds into higher-interest-bearing accounts, increasing banks’ funding costs. The decline in deposits has squeezed liquidity for many banks while the value of their securities — which make up a large part of their liquidity — has fallen.”

Notably, the collapse of Silicon Valley Bank and Signature Bank in early March this year sparked a regional banking crisis, leading to a deposit flight despite regulators’ emergency actions to shore up confidence.

The rating agencies are warning that the current high interest rate environment has made many banks with substantial unrealized losses not reflected in their regulatory capital ratios vulnerable to a loss of confidence.

The Fed increased interest rates at the fastest pace in decades to contain the stubborn inflation, which has slowed down credit demand.

Mounting Troubles for the Banking Industry

In an exclusive interview with CNBC last week, Fitch Ratings’ analyst Chris Wolfe said that though slashing of the banking industry’s ratings to AA- from AA in June didn’t lead to ratings downgrades for banks, another one-notch downgrade in the industry ratings to A+ will result in the recalibration of “all our financial measures and would probably translate into negative rating actions.”

Such action will place the industry’s ratings below those of Wall Street giants like JPMorgan and Bank of America. Thus, the credit ratings of these large lenders will be cut, leading to a cascading effect, as smaller banks’ ratings will have to be adjusted as well.

While noting that the downgrades are uncertain, Wolfe stated that the risks are real.

The major factor that is likely to push Fitch to slash the industry’s ratings is the path of the interest rates that will be decided by the Fed. Though several market participants are of the opinion that the rate hikes are done for now and the central bank might cut rates next year, this isn’t inevitable. Higher rates for longer periods will put a strain on banks’ profitability.

At present, ASB, VLY and CMA carry a Zacks Rank #4 (Sell). KEY and UMBF carry a Zacks Rank #5 (Strong Sell).
Comerica Incorporated (CMA): Free Stock Analysis Report

KeyCorp (KEY): Free Stock Analysis Report

UMB Financial Corporation (UMBF): Free Stock Analysis Report

Valley National Bancorp (VLY): Free Stock Analysis Report

Associated Banc-Corp (ASB): Free Stock Analysis Report

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