Wednesday, October 4

US banks’ shares plummeted as a result of S&P downgrades some ratings.

On Tuesday, the shares of several U.S. banks experienced a drop after S&P Global and Moody’s both cut their credit ratings for regional lenders with significant commercial real estate exposure.

The action of S&P will increase the cost of borrowing for a banking sector that is trying to recover from relegation to terrorism earlier this year, when three regional lenders failed, leading to wider industry turmoil.

David Wagner, portfolio manager at Aptus Capital Advisors, pointed out that the Fed’s efforts to maintain inflation with higher rates still pose risks to banks on their balance sheet.

S&P’s ratings on Associated Banc-Corp and Valley National Bancorp were downgraded on Monday, reflecting the increased risk of funding and the greater dependence on brokered deposits.

UMB Financial and Comerica Bank were downgraded by the rating agency due to deposit outflows and higher interest rates. Additionally, KeyCorp’s ratings were reduced due in part to limited profitability.

The major banks’ stocks were affected by the rating action, despite not being listed by S&P. JPMorgan Chase and Bank of America experienced a nearly 2% decline in their shares.

Citgroup, Wells Fargo, Goldman Sachs, and Morgan Stanley all saw a 1% decrease.

Over 3% of the shares in KeyCorp, Comerica, and Associated Banc-Corpp fell, while Valley National and UMB Financial fell by 2% to 4%.

Despite the fact that banks experienced healthier-than-expected loan growth in the second quarter, Wagner believes that lenders will continue to face challenges.

S&P’s forecast for S.T Bank and River City Bank was lowered to “negative” from “stable,” as it believed that the banks would have more CRE exposure.

S&P Global Market Intelligence’s data reveals that the cost of insuring U.S. banks against a default has increased significantly. On Tuesday, Goldman Sachs experienced 78 basis points in five-year credit default swaps, which is now its highest level in almost one month.

Following Moody’s downgrade, S&P took action, which followed a similar move by the same agency.

Banks have been impacted by the U.S. Federal Reserve’s interest rate hikes, as they are now required to pay more interest on deposits to keep customers from switching to higher-yielding options.

Brian Mulberry, a client portfolio manager at Zacks Investment Management, explained that the downgrades are primarily caused by liquidity issues in their lending portfolios, which have been raised by multiple agencies.

The downgrades have highlighted the strains, but there is no immediate systemic risk in the banking industry, according to him.

An analyst from Fitch, the third and final chief rating agency, informed CNBC that several U.S. banks, including JPMorgan, may face downgrades if the sector’s “operating environment” worsened.

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