file photo by Boyd Loving
the staff of the Ridgewood blog
Ridgewood NJ, bank stocks continue to face a crisis of confidence , on Tuesday after Moody’s Investors Service announced it had downgraded 10 small and midsize American lenders, and that it may do the same with a handful of major firms. Higher funding costs, potential regulatory capital weaknesses and rising risks tied to commercial real estate are among the strains that prompted a review, Moody’s said.
The firm lowered the ratings of 10 banks by one rung, while major lenders Bank of New York Mellon, U.S. Bancorp, State Street, Truist Financial, Cullen/Frost Bankers and Northern Trust are now under review for a potential downgrade.
Moody’s also changed its outlook to negative for 11 banks, including Capital One, Citizens Financial and Fifth Third Bancorp.
Among the smaller lenders receiving an official ratings downgrade were M&T Bank, Pinnacle Financial, BOK Financial and Webster Financial.
“U.S. banks continue to contend with interest rate and asset-liability management (ALM) risks with implications for liquidity and capital, as the wind-down of unconventional monetary policy drains systemwide deposits and higher interest rates depress the value of fixed-rate assets,” Moody’s analysts Jill Cetina and Ana Arsov said in the accompanying research note.
Rattled by the spring banking kerfuffle that saw the quick implosion of several regional banks, investors have been watching closely for signs of stress in the industry as high interest rates force firms to pay more for deposits while boosting the cost of funding from alternative sources. At the same time, those elevated rates are eroding the value of bank assets and making it harder for commercial real estate borrowers to refinance their debt, potentially weakening lender balance sheets. “Rising funding costs and declining income metrics will erode profitability, the first buffer against losses,” Moody’s wrote. “Asset risk is rising, in particular for small and midsize banks with large CRE exposures.”
We have said this before , the normalization of interest rates will put short term pressure on financial institutions , but in the long run a more natural yield curve recognizing risk will create a better environment for lenders . Apparently some investors agreed and despite all that bad news for breakfast, the end of the day saw the broader market and some of those banks finish off on an upward trajectory as buy on the dip buyers looked to take advantage .
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