Next Up in the Financial Downgrade Era: Moody’s

( – Fitch Ratings Inc., one of the US Security and Exchange Commission’s (SEC’s) three recognized statistical rating groups, downgraded the United State’s long-term default rating to AA+ from its previous AAA foreign currency issuer score on August 1. Key drivers included increasing government deficits and Congress’ recent battle over raising the debt ceiling. Following suit, Moody’s Investors Service, another SEC-recognized organization, recently issued credit rating downgrades for several banks.

On August 7, Moody’s issued an expansive report detailing current and projected funding risks with US banks that could test the financial institutions’ credit strength, increase asset risks, and weaken profitability. Noting that a “mild US recession… [loomed] on the horizon,” Moody’s stated that recent “asset quality” declines, “unconventional monetary policy drains,” and “higher interest rates underpinned their latest actions regarding the rating of 27 US-based banks.

Following its previous actions in March and April, Moody’s report downgraded the credit rating of 10 banks, placed six on review for a potential reduction, and raised the outlook of 11 financial institutions to stable from their previous negative designation.

The 10 Downgraded Banks Are:

Amarillo National
Associated Banc-Corp
BOK Financial
Commerce Bancshare
Fulton Financial
M&T Bank
Old National Bancorp
Pinnacle Financial Partners
Prosperity Bank
Webster Financial Corp

Three of the banks receiving downgrades had a post-rating outlook of negative, while others remained stable. Eleven other banks saw their post-rating status drop to negative from their previous assessment of stable. However, the baseline credit assessment ranking remained the same.

Moody’s report charted the 27 banks’ public income statement and balance sheet metrics as of the end of quarter one, 2023. They consider those figures along with quarter two earnings releases in determining their rating for each institution.

That chart listed the financial institutions’ available-for-sale securities, their held-to-mature securities, and residential mortgages as a percentage of tangible common equity. Moody’s determined that all 10 downgraded banks showed a negative result ranging from -8% to -69%.

In layman’s terms, Moody’s lowered the rating of 10 banks, warning that the current economic environment coupled with rising interest rates left them “vulnerable to a loss of confidence” and “sizable unrealized losses.” The report also warned that if the country entered a recession — which Moody’s projected would happen in early 2024 — the potential for further erosion of the banks’ capital would worsen.

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