S&P Global downgraded its bond ratings for five US regional banks, another reminder of the many challenges facing an industry roiled by high interest rates, rising funding costs, and eroding profitability.
The agency lowered ratings for Associated Bank, Comerica, Key Bank, UMB Financial Corp, and Valley National Bancorp. It also revised outlooks for River City Bank and S&T Bank to negative while maintaining a negative outlook for Zions Bancorporation. KeyCorp, Comerica, and Associated Banc-Corp shares sank more than 3% on the downgrade announcement, while Valley National and UMB Financial slid between 2% and 4%.
The rating action weighed on the stocks of major banks even though they were not mentioned by S&P. Shares of JPMorgan Chase and Bank of America both fell almost 2%.
Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley each dropped about 1%.
Many depositors have "shifted their funds into higher-interest-bearing accounts, increasing banks’ funding costs," S&P said. "The decline in deposits has squeezed liquidity for many banks while the value of their securities — which make up a large part of their liquidity — has fallen."
For instance, S&P cited Comerica’s $14 billion decline in average deposits from the second quarter of last year to this year as one of the reasons for its downgrade. It also pointed to its “relatively high proportion of commercial and uninsured deposits,” in a note explaining its decision. Deposits held by FDIC-insured banks have fallen 6% since the beginning of 2022, according to S&P Global.
“These downgrades are mainly focused on the liquidity concerns now raised by multiple agencies where banks have a lot of loan portfolios that are only drawing 2.5-4.5% in interest income while now needing to pay depositors 4.5-5.5% in savings and money market accounts,” said Brian Mulberry, client portfolio manager at Zacks Investment Management.
The downgrades from S&P Global announced on Monday night came two weeks after Moody’s Investors Service downgraded 10 mid-sized institutions by a single notch, warned about a review of six additional lenders, and assigned a negative outlook to 11 others.