S&P Global Cuts Credit Ratings and Outlook on U.S. Regional Banks Amid Funding Costs and Real Estate Troubles
August 22, 2022
S&P Global, a leading credit rating agency, has followed Moody’s in cutting its credit ratings and outlook on multiple U.S. regional banks. The agency cited higher funding costs and troubles in the commercial real estate (CRE) sector as factors that are likely to test the credit strength of these lenders.
The relentless rate-hike campaign by the U.S. Federal Reserve has raised deposit costs at banks, forcing them to pay higher interest rates to retain depositors. S&P Global specifically cut its ratings on Associated Banc-Corp, Valley National Bancorp, UMB Financial Corp, Comerica Bank, and KeyCorp due to funding risks, higher reliance on brokered deposits, large deposit outflows, and prevailing higher interest rates. As a result of this news, KeyCorp and Comerica shares were down nearly 1% each in premarket trading.
In addition to the downgrades, S&P Global also cut the outlook of S&T Bank and River City Bank from “stable” to “negative” due to their higher exposure to the CRE market.
The agency’s action will make borrowing costlier for the ailing banking sector, which is trying to recover from the crisis earlier this year. The collapse of Silicon Valley Bank and Signature Bank sparked a loss of confidence among depositors, leading to a run on deposits at several regional lenders.
Not only are borrowing costs rising in the U.S., but they are also surging globally. U.S. Treasury yields have reached their highest level in 16 years, contributing to the bond market rout that has persisted for six weeks. However, U.S. stock index futures gained, thanks to the performance of megacap growth stocks.
S&P Global’s downgrades come weeks after similar actions by Moody’s. Earlier this month, Moody’s lowered ratings on 10 U.S. banks and put six, including Bank of New York Mellon, US Bancorp, State Street, and Truist Financial, on review for potential downgrades.
The last of the three chief rating agencies, Fitch, also expressed concerns about the U.S. banking sector. An analyst from Fitch stated that if the sector’s “operating environment” were to deteriorate further, several U.S. banks, including JPMorgan Chase, could face downgrades.
In summary, S&P Global’s downgrades and negative outlook revisions for U.S. regional banks highlight the challenges posed by higher funding costs and troubles in the CRE sector. With borrowing costs on the rise, the banking sector will face increased difficulties as they try to overcome the impacts of the earlier crisis. The implications of these downgrades and the broader economic environment will be closely watched by investors and industry analysts.
Reporting by Gokul Pisharody and Niket Nishant in Bengaluru; Additional reporting by Akanksha Khushi; Editing by Varun H K, Pooja Desai, and Anil D’Silva
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