After Moody's, S&P Downgrades Ratings On US Banks; Who Are These Lenders And Why?

After Moody's Investors Services, S&P Global Rating trimmed the rating on four US banks, while revising the outlook for another two lenders. These US lenders were KeyCorp, Comerica Inc, Associated Banc Corp., and UMB Financial Corp whose ratings were lowered by S&P, while the outlook was revised to 'Negative' in S&T Bank and River City Bank outlooks. Pressure in earnings, lower capital ratios, weaker funding and constrained profitability were among the key reasons for S&P's latest rating actions in these banks. This led to sharp selling in US bank stocks overnight, dragging broader Wall Street.

KeyCorp:

S&P Global lowered the long-term ratings on KeyCorp (Key) to 'BBB' from 'BBB+' and those on its bank to 'BBB+' from 'A-'. Also, S&P affirmed the 'A-2' short-term ratings on both entities.

In its rating rationale, S&P said, "The downgrade reflects S&P Global Ratings' view that higher interest rates will continue to pressure profitability for longer and to a greater degree at Key than at Category IV bank peers. Specifically, we believe that interest rate risk management amid higher-for-longer rates will constrain profitability at Key more than at large regional bank peers. In addition, we expect that this pressure will only gradually abate until the cumulative benefit of hedge and treasury securities portfolio maturities builds substantially by the end of 2024."

S&P expects Key's net interest income will continue to face headwinds at least through the end of 2024 because of its position on certain available-for-sale securities and interest-rate hedges, and because of the competitive environment for deposits.

Comerica Inc:

Similarly, S&P lowered its long-term issuer credit ratings on Comerica Inc. to 'BBB' from 'BBB+' and on its main bank subsidiary, Comerica Bank, to 'BBB+' from 'A-'. The agency also affirmed our 'A-2' short-term ratings on Comerica Inc. and Comerica Bank. The outlook on the long-term ratings is stable.

It said, "The rating action reflects our view that Comerica's commercially oriented business model, financial performance, and business stability have become less predictable in the current economy. We think industry pressures and our expectation that interest rates will remain higher for longer have reduced Comerica's business stability and predictability. Comerica has had substantial deposit and margin pressures, which we view as more significant than for most regional bank peers."

Further, the rating agency added, "We think the shift suggests less deposit stability and has weighed heavily on the company's net interest margin (NIM)."

S&P thinks Comerica's relatively high proportion of commercial and uninsured deposits are more price-sensitive in the current interest rate environment. Comerica's funding ratios have weakened because of deposit outflows and strong loan growth.

Also, it believes that the funding ratios could weaken further, given robust, though slowing, loan growth. Comerica expects full-year loan growth of roughly 8% in 2023, including its exit from the mortgage banker finance business and increased selectivity, driven by growth in commercial real estate (CRE) and dealer originations.

Associated Banc-Corp:

S&P trimmed its long-term issuer credit ratings on Associated Banc Corp. to 'BBB-' from 'BBB' and on bank subsidiary Associated Bank N.A. to 'BBB' from 'BBB+'. The outlook is stable.

According to S&P, Associated Banc Corp.'s funding has worsened in 2023 with a greater reliance on brokered deposits and other higher-cost borrowings, and its loan-to-deposit ratio is higher than those of most rated U.S. banks, while its net interest margin has declined by 53 basis points year to date.

Given the company's expectations for loan growth, S&P said, "we expect these trends to continue to constrain profitability amid higher-for-longer interest rates." On the stable outlook, S&P added that it reflects "our expectation that the company's relatively well-balanced loan portfolio and reasonably diversified revenue base, adequate capital, and satisfactory asset quality will remain supportive of its creditworthiness."

UMB Financial Corp:

S&P cut it's long- and short-term issuer credit ratings on UMB Bank N.A. to 'A-/A-2' from 'A/A-1' and its long-term issuer credit rating on UMB Financial Corp. to 'BBB+' from 'A-'. At the same time, S&P affirmed its 'A-2' short-term issuer credit rating on UMB Financial Corp. The outlook on the long-term ratings is stable.

UMB's capital ratios have declined over the past few years, with its risk-adjusted capital ratio, based on our measure, decreasing to 9.0% on June 30, 2023, in part because of high loan growth, S&P said.

Further, it added, "Given our expectations for loan growth rates, combined with earnings constrained by net interest margin pressures and potentially higher loan loss provisions, we do not expect capital to return to strong levels within the next two years."

The stable outlook indicates S&P's expectation that UMB will remain profitable (with a good mix of revenue), capital ratios will remain adequate, asset quality measures will continue to outperform peer averages, and deposit funding will fully support its lending businesses.

River City Bank:

While affirming 'BBB-' issuer credit ratings on River City, S&P lowered the bank's long-term rating outlook to negative from stable. It said, "The negative outlook reflects our expectations that as rates stay higher for longer, the bank's funding mix and asset concentrations could create headwinds for earnings that in turn could lead to a deterioration in capital ratios."

As per S&P, River City Bank's exposure to commercial real estate is the highest of all rated U.S. banks. Although it has conservatively underwritten its loan book, we believe a prolonged period of high-interest rates could test its resilience, given the bank's structural liability sensitivity.

S&T Bank:

S&P also revised the outlook on its long-term issuer credit rating on S&T Bank to negative from stable, while affirming 'BBB' long-term issuer credit rating. It said, "The negative outlook indicates that we could lower the rating in the next two years if S&T's funding worsens or if asset quality deteriorates meaningfully, particularly if that pressured earnings or capital ratios."

S&P believes that the bank's higher-than-peer commercial real estate (CRE) exposure, including construction loans, could pose a risk to its asset quality. S&T Bank has experienced significant core deposit outflows over the last year, weighing on its liquidity and leaving it with worse funding metrics than most rated U.S. banks.