Bank stocks are under pressure early Tuesday after rating agency Moody's downgraded ten small regional banks and placed several larger banks on review for downgrades.
Moody's said the rating action reflects the ongoing strain in the US banking sector, including increased funding pressures and potential regulatory capital weaknesses rising risks associated with commercial real estate exposures.
The firm downgraded ratings of M&T (NYSE:MTB), Amarillo National Bank, Old National (NASDAQ:ONB), Commerce Bancshares (NASDAQ:CBSH), Associated Banc-Corp (NYSE:ASB), BOK Financial (NASDAQ:BOKF), Webster Financial (NYSE:WBS), Prosperity Bancshares (NYSE:PB), Fulton Financial (NASDAQ:FULT), and Pinnacle Financial Partners (NASDAQ:PNFP).
Meanwhile, the firm placed The Bank of New York Mellon (NYSE:BK), U.S. Bancorp (NYSE:USB), Truist Financial Corp. (NYSE:TFC), State Street (NYSE:STT), Northern Trust (NASDAQ:NTRS) on review for downgrades.
Moody's noted the stability of US banks' deposit funding has notably decreased, reflected in Moody's recent downgrade of the US macro profile from "very strong -" to "strong +". Q2 earnings revealed higher funding costs and profitability pressures due to rapid tightening in monetary policy and an inverted Treasury curve, expected to persist, impacting profitability and internal capital generation. Some banks are conserving capital by reducing loan growth, but this slows the shift to higher yielding assets as funding costs rise, affecting profitability. Rising interest rates also devalue US banks' fixed-rate securities and loans, while current regulations inadequately consider interest rate risks, potentially leading to liquidity challenges.
While megabanks like JPMorgan (NYSE:JPM), Wells Fargo (NYSE:WFC), Bank of America (NYSE:BAC), and Citigroup (NYSE:C) were unaffected by the Moody's rating actions, shares were lower across the board in early trading Tuesday.