Moody’s Downgrades U.S. Banks as Deposit Interest Expenses Rise Sharply
Zhitong Finance APP has recently reported that Moody’s, the credit rating agency, downgraded the ratings of several banks in the U.S. and issued outlook warnings. This downgrade indicates that the American banking industry continues to face challenges, even after the collapse of Silicon Valley Bank.
Although concerns about the banking sector eased after the stabilization of deposit levels in the second quarter, smaller lenders are now facing a new problem. They are being forced to pay customers higher interest rates on deposits, which is outpacing the growth in loan income.
Ana Arsov, the co-head of global banking at Moody’s Investors Service, explained, “These banks kept their deposits, but they did so at a cost. They had to replace it with more expensive funds. It’s a matter of profitability as deposits continue to leave the banking system.”
Normally, banks thrive when interest rates rise as they can charge higher interest rates on loans and other financial products. However, this time, the boost was short-lived. The first quarter of this year saw bank failures, causing savers to withdraw their funds and leading to negative net interest margin growth.
“There is a peak in bank profitability right now,” Arsov stated. “One of the strongest factors for U.S. banks, which was above-average profitability compared to the rest of the system, will disappear as loan growth weakens and interest rates show poor ability.”
Shrinking profit margins, coupled with relatively low capital levels compared to some regional bank peers, and concerns about defaults in commercial real estate were the key factors behind Moody’s reassessment and downgrade of the bank’s ratings. Moody’s had previously placed six banks, including First Republic, on watch for a downgrade and changed the industry outlook from stable to negative.
US Bancorp and Fifth Third Bank were among the banks impacted by the lower profit margins. Moody’s has put US Bancorp on watch for a possible downgrade due to increased deposit costs and increased use of wholesale funding. Similarly, Fifth Third Bank’s rating outlook has been downgraded to negative from stable, citing rising deposit costs.
However, Moody’s highlighted that the U.S. banking system as a whole remains strong, and even the banks that were downgraded still hold investment-grade ratings with low default risk.
“We’re not warning that the banking system is broken; we’re saying that over the next 12 months to two years, bank profitability will come under pressure, regulation will tighten, and the cost of credit will rise,” Arsov clarified.
While challenges lie ahead for the U.S. banking industry, it is important to note that Moody’s rating actions do not suggest a complete breakdown of the system. In the coming years, banks will need to navigate through tighter regulations and increased costs, which may impact their profitability.
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