S&P Global Ratings has cast a spotlight on the challenges faced by several U.S. regional banks, resulting in a series of downgrades that have reverberated through the financial sector.
According to the renowned rating agency, the Federal Reserve's tight grip on monetary policy is now putting a strain on the funding, liquidity, and revenue of many U.S. banks.
S&P Global Ratings' Actions On US Banks
Among the banks affected by the downgrades, Associated Banc-Corp
Both Comerica and Keycorp slipped 0.8% in the premarket trading on Tuesday.
Additionally, River City Bank
S&P affirmed the rating and maintained a negative outlook on Zions Bancorporation N.A.
Moody's took a similar action earlier this month, when it downgraded 10 U.S. banks and placed six on review for prospective downgrades, including Bank of New York Mellon Corp.
Rising Distressed Loans, Funding Costs and Liquidity Squeeze
The impact of higher interest rates on borrowers is becoming evident through rising nonperforming assets, delinquencies, and charge-offs, approaching historical averages, according to S&P Global Ratings.
The report also suggests that banks with significant exposure to commercial real estate (CRE), especially office loans, could face the most significant strains on asset quality.
U.S. banks have increasingly turned to wholesale borrowings as a means of raising capital, leading to a more than 40 basis points rise in funding costs in the second quarter and over 180 basis points since the Federal Reserve began its rate hikes. The decrease in deposits has also put pressure on liquidity for many banks.
S&P Global Ratings estimates that FDIC-insured banks collectively held more than $550 billion in unrealized losses on available-for-sale and held-to-maturity securities as of June 30, 2023.
Far From Being A Systemic Risk
While challenges remain for U.S. regional banks amid changing economic conditions, S&P Global Ratings indicates that most banks have taken steps to mitigate risks and maintain stability.
"About 90% of the banks we rate have stable outlooks while only 10% have negative outlooks," analysts wrote in the report.
"The preponderance of stable outlooks reflects that stability in the U.S. banking sector has improved significantly in recent months," analysts indicated, adding that "most banks can manage a likely further moderate deterioration in funding."
The SPDR S&P Regional Banking ETF