After downgrading small to midsize banks, the rating agency Moody’s still believes the U.S. banking sector is strong. The downgrade of Small to midsize lenders has caused the agency to warn about a decline in profits, which could lead to a cut in the ratings of several major banks.
The Managing director of financial institutions at Moody’s, Ana Arsov, said, “What we’re doing here is recognizing some headwinds – we’re not saying that the banking system is broken.”
Arsov said banks will face tougher times to make money because of the climbing funding costs, interest rates, and looming recession. All factors can drag down profits. She added that, despite all the downgrading, the baking system in the U.S. is still highly rated in the world.
Arsov said, “This is largely a profitability story – we are not raising major concerns that the system is majorly undercapitalized or underfunded.”
After Moody’s action last Monday, the S&P index of bank stocks slid by 1%, and the agency took action against 27 lenders. There were negative outlooks for some banks, while for others, the ratings were cut down or were under review.
An associate managing director at Moody’s, Jill Cetina, said, “As you look ahead, it doesn’t feel like the pressure from interest rates being higher and overall monetary policy tightening is close to abating.”
According to Arsov, the change in rating is because of the possibility of a shrinkage in bank profits in the coming quarters. More borrowers will miss payments on their loans if the economy worsens, which eventually will lead to default.
Arosav added that, In recent years, Credit performance has been “stellar”, so “we only can go up in credit costs from here” in areas such as commercial real estate and consumer loans.
As banks pay higher rates to customers to retain deposits, their profit margin will continue to be compressed.
Cetina said, “We’ve seen funding strains in the banking sector”. “The interest rate risk, I think, was something that the U.S. banking sector was not prepared particularly well for, and because of that, we have some challenges at certain banks.”
