The US banking sector experienced a tumultuous Tuesday as shares of various banks plunged in response to credit rating downgrades by S&P Global, echoing a recent move by Moody’s.
The aftermath of these downgrades sent ripples across the industry, raising concerns about the financial stability of regional lenders and the broader banking landscape.
The Ripple Effect of S&P’s Downgrades
S&P Global’s decision to lower credit ratings on several regional lenders with substantial exposure to commercial real estate (CRE) has sent shockwaves through the financial market.
This move is expected to have a significant impact on the borrowing costs of these banks, potentially hampering the sector’s recovery efforts from the crisis that unfolded earlier in the year.
The collapse of three regional lenders led to industry-wide turmoil, prompting investors and regulators to be on high alert.
David Wagner, a portfolio manager at Aptus Capital Advisors, highlighted the persistent risks faced by banks due to certain structural aspects of their balance sheets.
The Federal Reserve’s strategy of maintaining higher interest rates as a means to anchor inflation has further exacerbated these risks.
The fragile profitability of banks, coupled with the Fed’s prolonged rate hikes, has created a challenging environment for lending institutions.
In its credit rating downgrades, S&P targeted several regional lenders for reasons ranging from funding risks to higher reliance on brokered deposits.
Associated Banc-Corp and Valley National Bancorp faced ratings cuts due to these concerns.
UMB Financial Corp and Comerica Bank also found themselves downgraded, as deposit outflows and higher interest rates became critical issues. KeyCorp’s constrained profitability led to a reduction in its ratings as well.
Interestingly, despite the fact that major banks like JPMorgan Chase and Bank of America were not explicitly mentioned in S&P’s actions, their stocks experienced a notable decline.
JPMorgan Chase and Bank of America shares both fell nearly 2%, while Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley each saw drops of around 1%.
However, the most significant blows were borne by KeyCorp, Comerica, and Associated Banc-Corp, with their shares plummeting by more than 3%.
Valley National and UMB Financial suffered losses ranging from 2% to 4%.
Even though the second quarter saw healthier-than-expected loan growth, analysts like Wagner remain cautious about the future.
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US Banks Grapple with Persistent Effects of Downgrades
The consequences of the downgrades are anticipated to persist, casting a shadow over the sector’s prospects.
The adverse effects on US banks are further evidenced by the cost of insuring against defaults, with credit default swaps for Goldman Sachs experiencing an uptick.
The Federal Reserve’s ongoing interest rate hikes have considerably raised operational costs for banks.
Institutions are now compelled to allocate more funds towards interest payments on deposits to prevent customers from exploring higher-yield alternatives.
Brian Mulberry, client portfolio manager at Zacks Investment Management, highlighted the liquidity concerns posed by the downgrades.
Banks, holding loan portfolios yielding lower interest rates, are now required to pay depositors higher interest rates for savings and money market accounts.
Although these credit rating downgrades have underscored strains within the banking sector, analysts suggest that there isn’t an immediate systemic risk.
The industry seems equipped to navigate these challenges, but concerns persist given the evolving landscape.
An analyst at Fitch Ratings indicated that further deterioration in the sector’s operating environment could lead to additional downgrades, highlighting the ongoing vulnerability of even major players like JPMorgan Chase.
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