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Moody’s Investors Services Cuts Ratings of 10 U.S. Banks

Moody’s Investors Services Cuts Ratings of 10 U.S. Banks

Moody’s also predicts a mild recession.

Legal Insurrection readers may recall that the last time we checked on the status of the recent banking crisis, a mixture of bank sales and federal assistance staved off an escalation of the troubles.  It concluded with federal regulators holding an auction for First Republic.

Investigations into  Silicon Valley Bank, the first bank that was poised for collapse in spring’s cycle of failure, blamed the troubles on “a combination of extremely poor bank management, weakened regulations, and lax government supervision.”

Now Moody’s Investors Service has cut the credit ratings of 10 U.S. regional banks and said it was reviewing the ratings of six other institutions. The service explained it was concerned that the banks suffered from the same weaknesses in the banks as the ones we reported on earlier this year.

Moody’s Investors Service cut the credit ratings of 10 U.S. regional banks and said it was reviewing the ratings of six other institutions, pointing to lower profits and higher funding costs.

Shares of M&T Bank (MTB), Pinnacle Financial Partners (PNFP) and Commerce Bancshares (CBSH)—among the banks Moody’s downgraded—were all down 2% or more in morning trading All the cuts were by a single notch, and all the banks remained investment-grade….

Moody’s is reviewing its ratings on six others, including Bank of New York Mellon (BK), Northern Trust (NTRS), State Street (STT) and US Bancorp (USB), and has assigned a negative outlook to 11 more lenders.

The Moody’s action suggests the U.S. banking sector remains vulnerable to the problems that stirred a banking panic and brought down several smaller lenders, including Silicon Valley Bank, earlier this year. Those challenges include devalued bonds, jittery investors, customer-deposit withdrawals and higher funding costs.

The list of banks with a negative outlook was also expanded.

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.

…“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.

Bank stocks fell on the news.

Everything was looking good for bank stocks following the turmoil that occurred in March. The SPDR S&P Bank (ETF KBE –1.32, ticker: KBE) and SPDR S&P Regional Banking (ETF KRE –1.28%, KRE) had both rallied out of the trading hole they entered during the sector upheaval, and even looked set to break higher. Then Moody’s stepped in late Monday with ratings downgrades on 10 lenders, while putting six lenders on review for downgrade, and giving negative outlooks to 11 banks.

That sent the SPDR S&P Bank ETF and SPDR S&P Regional Banking ETF down 4% and 4.3%, respectively, in early trading Tuesday with shares of some of the affected banks faring even worse. Bank of America ( BAC –1.91%, BAC), down 3%, and JPMorgan Chase (JPM –0.56%, JPM), down 1.8% were dropping, despite not being mentioned.

The move is partly attributable to the depressed commercial real estate market and the banks’ risk exposure. The trends do not look positive.

The office market remains under pressure, as much space goes begging amid the continuing work-from-home trend. The national office vacancy rate reached 18.9% in the second quarter. On the construction front, the total growth in office space inventory in the first half of 2023 stayed well below the historical average.

Vacancy rates have even further to rise as remote work remains popular. American workers on average are coming into the office only half as frequently as in 2019. Metro areas with lots of tech companies will continue to feel pressure, given their high rates of remote work. Asking and effective rents haven’t changed much over the past four quarters as demand for office space has remained volatile.

Financing for offices is drying up. Delinquency rates for securities backed by commercial mortgages on offices rose to 4.5% in June — the highest level since 2018. The rise in delinquencies is leading some investors to stay away from commercial mortgage-backed securities with too much exposure to offices.

The cherry topper of this news: Moody’s predicted a mild recession.

“We continue to expect a mild recession in early 2024, and given the funding strains on the U.S. banking sector, there will likely be a tightening of credit conditions and rising loan losses for U.S. banks,” the agency said.

Let’s hope the economic consequences of Bidenomics are only a mild recession. These signs do not look promising.

And we can add this news to the long-lost subjects the mainstream media is not inclined to cover in depth.


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Lucifer Morningstar | August 9, 2023 at 7:33 am

And yet the Biden regime continues to insist the economy is in great shape and there’s nothing to worry about.

From what I’ve read and seen this is just the beginning.

One of the core issues not being discussed very much if at all is the distinction between opportunities for saving v investing. The broad middle-class has been in equal parts lured and forced into riskier asset classes due to the near zero interest rate environment of the previous 15 years or so. The narrative that there is no alternative to equity investment (TINA) has a good deal of validity.

Many folks abandoned CD/savings accounts and put their money into the stock market. The influx of retail cash along with everyone’s automatic monthly 401K/IRA contribution helped propel the stock markets. The availability of historically cheap $ allowed Corp to borrow for next to nothing, using the funds for acquisition or stock buy backs, both leading to higher stock prices. (IMO artificially v any underlying justification)

Very simplified, this created our current asset bubble. Covid work from home policies +rising crime has resulted in dramatically lower utilization of office space. Two office buildings in Baltimore sold for less than half their list price. The commercial real estate (CRE) market is wildly overvalued. Who made those loans? Largely regional banks. The regional banks have lots of CRE loans whose properties are now underwater and the borrowers have started to walk a way from these loans, abandoning the property and their obligation. A trickle that will become a flood.

The smaller region banks balance sheets are also getting crushed with higher interest rates b/c the older, lower interest rate Treasury instruments they own are also underwater. Currently the banks don’t have to mark to market on these due to a ‘pause’ by the Fed but this ends in late ’23. When that occurs, assuming the pause isn’t extended, there will be more chaos. Even an extension doesn’t alter the reality that many regional banks assets and liabilities are far out balance.

IMO, you should not keep more than the FDIC limit in a single Bank, preferably far less. Many have adopted this stance, which is why deposits are fleeing banks to higher yield money market funds at brokerage firms and higher yield treasuries. A 6 month Treasury is paying 5.26% v 2.89% last year and a 2 year is paying 4.783%, both significantly higher than a savings account or CD and both, for now exceed the ‘official’ inflation rate of 2.97% so offering a positive real rate of return. As long as this positive real rate of return environment exists the flows won’t end, IMO.

    randian in reply to CommoChief. | August 9, 2023 at 2:40 pm

    Most of those underwater Treasuries will have been rolled over by late ’23 since banks generally buy 52 week or shorter duration Treasuries. That they are underwater now doesn’t matter so long as the bank doesn’t suffer a run. Unfortunately for said banks Moody’s downgrade can precipitate a run.

      CommoChief in reply to randian. | August 9, 2023 at 4:11 pm

      Assuming they make it that far/long, as you point out the downgrade won’t help. The other issue may very well be an imbalanced duration mix. That many banks have tightened up considerably on lending, even at much higher rates, seems to indicate they may have cash flow issues due to improper duration in their portfolio.

It’s not so much deeply economic as that they all bought long term treasuries and are now squeezed between low income and pressure to raise paid interest rates on deposits. Traditionally any treasuries on the books are carried at cost but that doesn’t work if you need actual money to pay withdrawals to external accounts paying higher interest.

That’s an actual credit risk to lenders that they should know about.

The triggering event was shortage-induced “inflation” that the Fed had to deal with by preventing compensating wage increases, hence higher interest rates.

Arrgh, you both said what I was going to say, only so much better.

    Whitewall in reply to georgfelis. | August 9, 2023 at 8:58 am

    Me too! Now I don’t have to do all that thinking and typing. Simply, I am so old that I remember when we had an inverted yield curve as we do now, that was a bright yellow light signaling recession. Things have changed since the ‘Financial Crisis’ and all the Fed funny business that has never actually been resolved…just extended..

      Ironclaw in reply to Whitewall. | August 9, 2023 at 10:31 am

      The Fed funny business has guaranteed that the bad times will end up being much worse since they do nothing but blunt the market signals that allow for normal corrections.

Moody’s predicts a mild recession. I predict a major recession. Whose prediction is more credible?

    CommoChief in reply to Stuytown. | August 9, 2023 at 9:50 am

    Considering that wage pressure hasn’t been fully run through the market yet and that UAW is demanding 46% wage increase, Pilot union wants 40% increase, teamster union wrung $30 Billion out of UPS to raise driver pay up to $49 an hour then teamster basically broke the back of Yellow so that’s 15% market share of trucking evaporated.

    Oil prices going to stay high with OPEC+ cutting production Russia by 500K bpd and Saudi by a million bpd among others.

    These higher costs will increase shipping costs which will raise the price of everything so all in all more than a mild recession is likely. Take a look at housing costs, the increased cost of a loan from higher interest rates has boosted the cost of a home purchase by over 20%. All these price increases begin to reinforce themselves as workers demand higher wages to compensate, which means higher prices of the things they produce, which leads to more demand for higher wages……

      Stuytown in reply to CommoChief. | August 9, 2023 at 2:14 pm

      I agree. And there are so many other negative trends, including slowing growth and possibly outright deflation in China. Then there is the absurd misallocation of capital to all things “green.” Maybe AI will save everything!
      Much of that money might as well be flushed down a toilet. Further, the US has to continue to feed its addiction to debt, crowding out investment in the private sector.

        Stuytown in reply to Stuytown. | August 9, 2023 at 2:15 pm

        I meant to write “maybe AI will save everything״ at the end.

          CommoChief in reply to Stuytown. | August 9, 2023 at 4:24 pm

          The debt overhang is beginning to hit the federal government spending. Gonna be paying more than twice as much in FY’23 as FY’22 in interest costs.

          We will pay more interest costs this year than we spend on DoD. By next year we will very likely be spending more on interest costs than on Social Security, making the interest payments alone THE single largest expenditure of the Federal Govt. If not next year then NLT the year after.

          The crowd out effect within the Federal budget is beginning and will only grow larger. Many folks gonna be taken by surprise when ‘their’ favorite program gets reduced. All that magical thinking and wish casting that things will somehow ‘work out’ without any sacrifices and kicking the can down the road? The end of the road is in plain sight and still some folks won’t admit it.

          When the piggies begin to squeal as ‘their’ program gets cut that’s how you know they are waking up, by then it will be too late to avoid the sacrifices we should have made two decades or more ago. They would have been far smaller and easier to take but now the level of sacrifices required have grown very large indeed.

    Ironclaw in reply to Stuytown. | August 9, 2023 at 10:29 am

    Personally, I’ll be surprised if we don’t end up in a full-blown depression.

E Howard Hunt | August 9, 2023 at 9:39 am

It looks as though M&T Bank will have to remove its ampersand.

Real great economy the pedophile is running here. I don’t remember this sort of thing when we had a real, legitimately-elected president.

2smartforlibs | August 9, 2023 at 11:57 am

1980s savings and loan all over again. And people say history doesn’t repeat.

    henrybowman in reply to 2smartforlibs. | August 9, 2023 at 4:19 pm

    This is why scams have names, like The Wire, The Spanish Prisoner, and The Antique Violin. If they were executed only once apiece, there would be no point in naming them.

There is no “mild recession.” We are already in a recession and never left. We already had three consecutive quarters of negative growth, but because the administration are abject liars they simply said we are not in a recession and everyone, including conservatives who should know better, swallowed and went along with the lie. They all know the economy we have is shit, but none will simply defy Biden the Liar and just tell the truth.

Fortunately, Americans who are not part of the feeble in power know we are in a recession.

For those who want an actual list of the banks that isn’t behind a paywall:

Glad to see those vultures at Capital One on the list. Now, will this result in less US mail spam from these hucksters, or more?

What’s my wallet? Precious little.

The Bride and I agree that one of the best moves we made is dividing our accounts between a regional bank and a local credit union. Neither are large but they’re well managed.

What’s better right now, a money market account or a treasury note?

Thanks for that list! I had trouble finding a complete one. Would have been nice if it was in this article.

Insufficiently Sensitive | August 10, 2023 at 12:38 pm

The latest budget figures show that they are breaking peacetime, non-crisis records for spending and deficits… The biggest increase in outlays so far this year has been net interest on the soaring federal debt: a rise of $146 billion to $572 billion, or 34%. That interest total is nearly double all corporate tax revenue so far this year of $319 billion.”

The Democrat mob is less adept at governance than it is at looting the public till to benefit the Party, e.g. buy votes. It bothers them very little that it’s their grandchildren – oh, and ours – who’ll be struggling to pay off that vast debt at interest rates a bit higher than Obama’s ‘Qualitative Easing’ model.