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FameEX Hot Topics | S&P Downgrades Five Regional US Banks Amid Tough Banking Landscape

2023-08-24 16:49:11

S&P Global Ratings has taken a significant step by downgrading the ratings of five regional banks in the United States. This decision reflects the challenging operating environment that has plagued the sector since the beginning of the year. The banks affected by these downgrades are Associated Banc Corp., Comerica Inc., KeyCorp, UMB Financial Corp., and Valley National Bancorp. Additionally, the outlook for two other regional banks has been revised downward to negative. The downgrade of these five regional banks underscores the difficulties that regional institutions have faced in 2023, exacerbated by the dramatic collapse of Silicon Valley Bank (SVB) in March. This collapse triggered deposit withdrawals as customers moved their funds to larger banks, leading to significant funding challenges for many regional banks.

S&P's statement on the matter highlighted the adverse impact of rising interest rates and quantitative tightening measures implemented since March 2022 to counter high inflation. These measures have placed a burden on many U.S. banks, affecting their funding, liquidity, and spread income. Consequently, the value of bank assets has declined, increasing the risk of deterioration in asset quality. Regional banks are grappling with fierce competition from larger national banks to retain deposits, resulting in reduced profitability. For example, S&P pointed out that Comerica experienced a substantial annual drop of $14 billion in average deposits. Moreover, the shifting landscape of remote work has cast uncertainty on the necessity of office spaces, further raising concerns about regional banks' exposure to commercial real estate.

Moody's, in a similar vein, had downgraded the ratings of 10 regional banks earlier in the same month. These consecutive downgrades underscore the growing disparity between large national banks and their smaller regional counterparts. While major banks have shown resilience after the Silicon Valley collapse, regional banks continue to grapple with challenges. Although the majority of banks assessed by S&P still maintain stable outlooks, the proportion with negative forecasts has risen to 10%. The potential for asset quality deterioration is increasing, as indicated by the credit agency. In the context of witnessing some of the largest U.S. bank failures in history this year, S&P recommends that regional banks bolster their liquidity and capital reserves to weather these "challenging operating conditions."

Supporting this downgrade, the U.S. Federal Deposit Insurance Corporation (FDIC) recently highlighted the banking risks in 2023. July saw the closure of Tri-State Bank by the FDIC, marking yet another failure in the U.S. banking landscape. This sequence of events emphasizes the need for regional banks to adapt to the evolving financial landscape to ensure their stability.

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