Moody’s Investors Service cut its view on the entire banking system to negative from stable. The big three rating firm cited a ”‘rapidly deteriorating operating environment” despite regulators’ efforts to shore up the industry.
In a
harsh blow to an already-reeling sector, Moody’s Investors Service cut its view
on the entire banking system to negative from stable.
The
firm, part of the big three rating services, said Monday it was making the move
in light of key bank failures that prompted regulators to step in Sunday with a
dramatic rescue plan for depositors and other institutions impacted by the
crisis.
“We have
changed to negative from stable our outlook on the US banking system to reflect
the rapid deterioration in the operating environment following deposit runs at
Silicon Valley Bank (SVB), Silvergate Bank, and Signature Bank (SNY) and the
failures of SVB and SNY,” Moody’s said in a report.
The move
followed action late Monday, when Moody’s warned it either was downgrading or
placing on review for downgrade seven individual institutions.
The
moves are important because they could impact credit ratings and thus borrowing
costs for the sector.
In its
downgrade of the entire sector, the rating agency noted the extraordinary
actions taken to shore up impacted banks. But it said other institutions with
unrealized losses or uninsured depositors still could be at risk.
The
Federal Reserve established a facility to ensure that institutions hit with
liquidity problems would have access to cash. The Treasury Department
backstopped the program with $25 billion in funds and vowed that depositors
with more than $250,000 at SVB and Signature would have full access to their
funds.
But
Moody’s said that concerns remain.
“Banks
with substantial unrealized securities losses and with non-retail and uninsured
US depositors may still be more sensitive to depositor competition or ultimate
flight, with adverse effects on funding, liquidity, earnings and capital,” the
report said.
Bank
stocks rallied strongly despite the downgrade. The SPDR Bank exchange-traded
fund rose nearly 6.5% in morning trade. Major indexes also were higher, with
the Dow Jones Industrial Average up nearly 450 points, or 1.4%.
Moody’s
on Monday downgraded Signature Bank and said it would remove all ratings. It
placed the following institutions under review for potential downgrades: First
Republic
,
Intrust Financial, UMB, Zions Bancorp, Western Alliance and Comerica
The firm
noted that an extended period of low rates combined with Covid pandemic-related
fiscal and monetary stimulus have complicated bank operations.
SVB, for
instance, found itself with some $16 billion in unrealized losses from
long-dated Treasurys it held. As yields rose, it eroded the principle value of
those bonds and created liquidity issues for the bank, long a favorite of
high-flying tech investors that couldn’t get financing at traditional
institutions. SVB had to sell those bonds at a loss to meet obligations.
Rates
rose as the Federal Reserve battled an inflation surge that took prices to
their highest levels in more than 40 years. Moody’s said it expects the Fed to
continue hiking.
“We
expect pressures to persist and be exacerbated by ongoing monetary policy
tightening, with interest rates likely to remain higher for longer until
inflation returns to within the Fed’s target range,” Moody’s said. “US banks
also now are facing sharply rising deposit costs after years of low funding
costs, which will reduce earnings at banks, particularly those with a greater
proportion of fixed-rate assets.”
The firm
said it expects the U.S. economy to fall into recession later this year,
further pressuring the industry.
https://www.cnbc.com/2023/03/14/moodys-cuts-outlook-on-us-banking-system-to-negative-citing-rapidly-deteriorating-operating-environment.html