S&P downgrades multiple US banks citing ‘tough’ lending environment

S&P Global cut the credit ratings of five regional U.S. banks and lowered its outlook for several other lenders, citing concerns over the “tough” lending environment. 

The agency said late Monday that it lowered the grades one notch for KeyCorp, Comerica Bank, Valley National Bancorp, UMB Financial Corp and Associated Banc-Corp amid growing risks from weaker funding, large deposit outflows and rising interest rates.

The rating agency also downgraded its outlook of S&T Bank and River City Bank to negative from stable, pointing to the high proportion of commercial real estate exposure.

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The move comes just two weeks after Moody’s roiled financial markets when it announced that it lowered the ratings of 10 small- and mid-sized banks by one notch and that it placed six banking giants – including U.S. Bancorp, Bank of New York Mellon and Truist Financial – on review for potential downgrades.

Among the firms that had their ratings cut by Moody’s were M&T Bank, Pinnacle Financial, BOK Financial, Webster Financial, Old National Bancorp and Fulton Financial.

“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 said of the decision.

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Regional banks were at the epicenter of recent upheaval within the financial sector after the stunning collapse of Silicon Valley Bank and Signature Bank triggered a deposit run in early March.

Authorities rushed to shore up confidence in the banking system with the launch of several emergency measures, but regional banks remain on edge.

The back-to-back downgrades come in the midst of the most aggressive monetary policy tightening campaign in decades. The Federal Reserve in July approved another interest rate hike, lifting the benchmark rate to the highest level since 2001. 

Higher interest rates have created more pressure on small- and mid-sized banks, which are seeing a spike in depositors who have “shifted their funds into higher-interest bearing accounts,” increasing banks’ funding costs, S&P said in an accompanying research note. 

Over the course of the past five quarters, non-interest-bearing deposits tumbled 23% while certificates of deposits and brokered deposits – which tend to be more expensive – have roughly doubled. 

“While many measures of asset quality still look benign, higher rates are pressuring borrowers, and nonperforming assets, delinquencies, and charge-offs are rising toward at least their historical averages,” S&P said. “Amid higher for longer interest rates, we expect further asset quality deterioration.”