Moody’s Warning: Turbulence Ahead for US Banking System
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Moody's, a reputable credit ratings agency, has recently expressed concerns about the stability of the US banking system.
According to their latest research note, Moody’s has decided to lower the ratings of 10 regional banks. Additionally, they are currently evaluating the potential downgrade of several major financial institutions, including Bank of New York Mellon, US Bancorp, State Street, Truist Financial, Cullen/Frost Bankers, and Northern Trust.
Following a period of relative calm, Moody’s has highlighted that American banks are now confronted with the possibility of facing additional outflows of deposits due to decreasing profitability and the ongoing series of interest rate hikes initiated by the Federal Reserve.
US banks are currently contending with various challenges related to managing interest rates and asset-liability matters, which carry implications for their liquidity and capital positions. As unconventional monetary policies are phased out, this reduces overall deposits, while higher interest rates exert downward pressure on the value of fixed-rate assets…
Despite a moderated decline in deposit funding due to quantitative tightening (QT) during the second quarter (Q2), there is still a notable concern that systemwide deposits could resume their decline in the forthcoming quarters. While most banks experienced either stable or only slightly reduced deposit levels, the composition of these deposits has shifted unfavorably. Non-interest-bearing deposits have decreased, prompting banks to offer higher deposit rates. Consequently, this shift has resulted in diminished net interest income and margins, ultimately affecting profitability and the banks’ ability to internally bolster their capital reserves.”
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Analyzing the Q2 performance of numerous banks, Moody’s analysts note mounting pressures on profitability. These pressures could hinder these banks’ ability to generate internal capital. This concern aligns with the anticipation of a mild economic downturn in the US early in 2024. As asset quality appears to be declining from its previously solid yet unsustainable levels, certain risks become evident, particularly in some banks’ commercial real estate (CRE) portfolios.”
Moody’s also suggests that the Federal Reserve is expected to maintain elevated interest rates until inflation aligns with its 2% target. Additionally, the agency predicts a possible upsurge in lending losses for US banks in the event of an economic recession.
“Moody’s ongoing projection points to a mild recession in the early months of 2024. Given the pressure on funding within the US banking sector, it is plausible that credit conditions could tighten, ultimately leading to increased loan losses for US banks.”