Risk assessment firm Moody’s Corporation (NYSE:MCO) is downgrading the outlook on the U.S. banking sector following the collapse of several banks. The credit rating company is also out with calls on seven regional banks.
What Happened: On Monday, Moody’s Investors Services announced rating action on seven banking companies, including Signature Bank (NYSE:SBNY), one of the collapsed banks.
Moody’s downgrades Signature Bank with a standalone baseline credit assessment of C. The company said it will withdraw ratings on the bank after the downgrade due to “business reasons.”
“The bank’s closure related to significant deposit outflows related to contagion from Silicon Valley Bank’s failure and the company’s cryptocurrency deposit concentration and large amount of uninsured deposits making the bank’s funding profile more sensitive to rapid and large withdrawals from depositors,” Moody’s noted.
Moody’s said the depositors will be protected by the FDIC backstop, but shareholders and certain unsecured debt holders will not.
Moody’s places the rating of Comerica Inc (NYSE:CMA) in review for a downgrade.
“Today’s rating action reflects Comerica’s high reliance on more confidence sensitive uninsured deposit funding, its high amount of unrealized losses in its available-for-sale securities portfolio, as well as relatively lower level of capitalization.”
Moody’s said Comerica’s share of deposits over the FDIC insurance level is “material.” Comerica could be forced to sell assets if it sees higher-than-anticipated outflows.
Moody’s places First Republic Bank’s (NYSE:FRC) ratings under review for a downgrade.
Moody’s said First Republic is highly reliant on “more confidence sensitive uninsured deposit funding.” The bank also has a high level of deposits above the FDIC insurance threshold.
Moody’s places INTRUST Financial Corporation’s ratings under review for a downgrade.
INTRUST has a high amount of unrealized losses from its available-for-sale securities portfolio and some reliance on uninsured deposit funding, according to the report.
Moody’s places UMB Financial Corporation’s (NASDAQ:UMB) ratings under review for a downgrade.
“Today’s action reflects UMB’s high reliance on more confidence sensitive uninsured deposit funding.”
Moody’s places the ratings of Western Alliance Bancorporation (NYSE:WAL) under review for a downgrade.
Western Alliance has high reliance on uninsured deposit funding and a “low, though improving, level of capitalization,” according to the report.
“Although Western Alliance’s proportion of market funding over total assets is modest, the share of its deposits which are above the Federal Deposit Insurance Corporation’s insurance threshold is significant.”
Moody’s places Zions Bancoporation’s (NASDAQ:ZION) ratings under review for downgrade.
The banking company has high reliance on uninsured deposit funding and a high amount of unrealized losses, according to the report.
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Why It’s Important: Moody’s ratings are widely used in the banking industry and trusted by investors.
“They address the possibility that a financial obligation will not be honored as promised. Such ratings reflect both the likelihood of default and any financial loss suffered in the event of default,” Moody’s website says.
Along with the seven ratings updates on individual banks, Moody’s announced Tuesday it has changed the overall outlook on the U.S. banking system.
“Moody’s Investors Service has 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, Silvergate Bank, and Signature Bank and the failures of SVB and SNY.”
Moody’s said that the FDIC has announced that all depositors of SVB and Signature Bank will be made whole, but the risks remain.
“The rapid and substantial decline in bank depositor and investor confidence participating this action starkly highly risks in US banks’ asset-liability management exacerbated by rapidly rising interest rates.”
Moody’s said asset risk metrics could rise over the next 12 to 18 months from historical lows. Profitability for banks could also decline.
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