NEW YORK (Reuters) Tuesday saw a decline in the value of some US banks’ shares after S&P Global and Moody’s both lowered the credit ratings of a few regional lenders with significant exposure to the commercial real estate (CRE) market.
A banking sector trying to emerge from a crisis earlier this year, when three regional bankers collapsed and caused more widespread industry turbulence, may find borrowing more expensive as a result of S&P’s decision.
According to David Wagner, portfolio manager at Aptus Capital Advisors, “some of the structural aspects for banks, regarding their balance sheet, remain risks to banks, as the Fed continues to try to anchor inflation with higher rates for longer.”
Due to financing concerns and a greater reliance on brokered deposits, S&P downgraded Associated Banc-Corp and Valley National Bancorp’s ratings on Monday.
It also downgraded Comerica Bank and UMB Financial Corp., citing decreased deposits and increased interest rates. KeyCorp’s ratings were also lowered by the rating agency due to its limited profitability.
Despite the fact that S&P did not specifically identify any big banks, the rating action had an impact on their equities. JPMorgan Chase and Bank of America both saw their shares drop by close to 2%.
A percentage point or so was lost by Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley.
Shares of KeyCorp, Comerica, and Associated Banc-Corp fell by over 3 percent, while Valley National and UMB Financial fell by 2 to 4 percent.
Wagner was “surprised” that banks’ loan growth in the second quarter was better than anticipated, but he still anticipates that lenders’ issues would endure.
In addition, S&P changed the outlook from “stable” to “negative” for S&T Bank and River City Bank due to increased CRE exposure.
Additionally, the cost of purchasing insurance against US bank default has increased. According to data from S&P Global Market Intelligence, Goldman Sachs’ five-year credit default swaps on Tuesday increased to 78 basis points from 77 bps at Monday’s close to their highest level in a month.
The downgrades by S&P’s colleague Moody’s, which reduced ratings on 10 US banks and issued warnings about prospective downgrades for other major institutions, came weeks after similar actions by S&P.
Banks now have to pay more interest on deposits to deter consumers from switching to higher-yielding alternatives, increasing expenses as a result of the US Federal Reserve’s interest rate increases.
According to Brian Mulberry, client portfolio manager at Zacks Investment Management, “These downgrades are primarily focused on the liquidity concerns now raised by multiple agencies where banks have a lot of loan portfolios that are only drawing 2.5-4.5pc in interest income while now needing to pay depositors 4.5-5.5pc in savings and money market accounts.”
Despite the stresses shown by the downgrades, there is no imminent systemic danger on the banking industry, he continued.
Last week, a Fitch analyst warned CNBC that numerous US banks, including JPMorgan Chase, might receive downgrades if the industry’s “operating environment” continued to deteriorate. Fitch is the last of the three major rating agencies.