U.S. banks face mounting challenges: Moody’s

The U.S. banking system isn’t out of the woods just yet, according to Moody’s Investors Service. The rating agency cut its view on the sector and downgraded certain banks, citing elevated interest rate and funding risks.

Moody’s lowered its macro outlook on the U.S. banking system, citing the impact of tighter financial conditions, tougher funding positions and a weaker operating environment, which are weighing on the credit strength of certain banks.

Alongside heightened interest rate risk, Moody’s said there are “negative credit implications for the U.S. banking sector that extend beyond immediate funding challenges to downward pressure on banks’ earnings, combined in some cases with weaker capitalization and risks related to commercial real estate.”

As a result, the rating agency downgraded 11 U.S. banks and lowered its rating outlooks on nine others.

“Declining securities valuations were the first warning of growing interest rate and [asset-liability management] risks among U.S. banks, but broader strains in some banks’ [asset-liability management] are increasingly evident as they contend with the unwinding of unconventional monetary policy and high and rising interest rates,” Moody’s said in a report.

While stable deposits have historically been a strength of the U.S. banking sector, Moody’s said the recent funding stress has prompted a reconsideration of the stability of deposits and their operational importance, which “has implications for funding, as well as banks’ asset mix and profitability.”

Additionally, some banks are facing a decline in net interest income and margins, it noted, and exposures to commercial real estate represent a growing risk “given high interest rates, rising unemployment and reduced credit availability to the sector,” it said.

In this environment, banks with weaker capital positions face “heightened challenges,” Moody’s stated.

“Banks with smaller tangible capital buffers may have increased client sensitivity that results in difficulty retaining uninsured deposits, leading to significantly more reliance on higher cost deposits and wholesale borrowing to avoid the forced sale of fixed-rate assets. Such a forced sale could crystallize unrealized losses on those assets and impair the banks’ regulatory capital ratios,” it said.

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