Rising Concerns and Uncertain Outlook Lead Moody's to Adjust Credit Ratings for US Banks

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In a significant move that reflected growing concerns over the financial robustness of US banks, Moody's Investors Service slashed the credit ratings of several minor and medium-sized American banking entities on Monday. Concurrently, Moody's signaled that there could be further downgrades, potentially involving some of the country's largest financial institutions.

The downgrade encompassed a total of ten banks, while another six banking powerhouses, namely Bank of New York Mellon, US Bancorp, State Street, and Truist Financial, were identified as candidates for possible future downgrades.

In its analysis, Moody's emphasized that recent quarterly financial disclosures unveiled increased strains on profitability, thereby undermining banks' capacity to cultivate internal capital reserves.

These developments coincide with mounting speculation regarding a mild recession that could grip the US economy in early 2024. Alarmingly, Moody's identified deteriorating asset quality as a probable concern, with specific attention drawn to the vulnerabilities associated with commercial real estate (CRE) portfolios in the banking sector.

High-interest rates coupled with a marked decrease in demand for office spaces and a constriction in CRE credit availability were cited as key elements aggravating the risks tied to elevated CRE exposures.

The outlook was subsequently revised to negative for a further eleven major financial players, which included notable names such as Capital One, Citizens Financial, and Fifth Third Bancorp.

Earlier this year, the failures of Silicon Valley Bank and Signature Bank ignited a widespread panic within the US banking sector. This resulted in an unprecedented rush on deposits across numerous regional banks, notwithstanding the initiation of urgent measures by authorities to stabilize trust within the industry.

Moody's, however, underscored an ongoing vulnerability within banks harboring significant unrealized losses that remain concealed from regulatory capital assessments, particularly in an environment characterized by elevated interest rates.

This comprehensive analysis by Moody's arrives at a time when monetary conditions are tightening in the wake of the Federal Reserve's swiftest series of interest rate hikes in decades. These hikes have not only rekindled fears of a recession but have also compelled sectors like real estate to grapple with the new realities emerging in the aftermath of the pandemic.

Last week's Federal Reserve survey data added to the apprehension, with US banks reporting more stringent credit protocols and a decline in loan demand from both commercial and individual borrowers. This trend, Morgan Stanley analysts believe, will likely persist, and the deceleration may even intensify.

In a parallel development, Fitch, another prominent rating agency, has also lowered the US credit rating to AA+ on account of fiscal decline anticipated over the forthcoming three years and recurring last-minute negotiations related to the debt ceiling.

The list of banks that suffered a credit downgrade by Moody's featured M&T Bank, Pinnacle Financial Partners, Prosperity Bank, and BOK Financial Corp, shedding further light on the intricate challenges confronting the banking industry in the United States.

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