6 More Banks are Under Moody’s Scanner

The Moody’s report on banking companies warns that rapid monetary tightening and weak risk management are amplifying banks’ underlying asset-liability risk. Recent bank failures and deposit runs have highlighted the vulnerabilities of US banks in weathering this cycle, with some facing significant deposit outflows and funding contagion. The report notes that some US banks’ ALM risks are higher and will remain so through the present period of tightening monetary policy. The report presents key metrics and considerations for US banks, such as unrealized securities losses, capitalization, profitability, and diversification of deposit mix. Moody’s is monitoring developments in ALM risk and may take further rating actions, as warranted. This blog post will discuss the implications of the report for US banks and their customers.

6 More Banks are Under Moody's Scanner
6 More Banks are Under Moody’s Scanner

The report highlights that some US banks are facing ALM strains due to the steep increase in the fed funds rate and the withdrawal of unconventional monetary policy, which are reducing bank deposits and weakening bank liquidity. The report notes that some US banks have weak governance and oversight of ALM risk, which has exacerbated their challenges in weathering this cycle. The report identifies some key sources of risk and stabilization, such as announced support from the US Treasury and Federal Reserve, ALM risk, capitalization, and profitability.

The report warns that despite official sector actions to address deposit runs, significantly higher interest rates will continue to weigh on some US banks’ profitability and economic capital. The official sector’s action is intended to protect the system against further funding runs but does not address banks’ vulnerability to excessive interest rate risk, which was the root cause of these banks’ distress. The report sees the approach taken as credit positive for uninsured depositors; however, bondholders and equity holders will still need to absorb the economic losses some banks face related to higher interest rates as well as credit losses that are likely to rise with the coming turn in the economic cycle.

The report notes that banks may still have difficulty raising fresh equity capital and have limited ability to generate capital internally given their excess interest rate risk and asset-liability management mismatch. Therefore, some US banks remain exposed to increased ALM risk, reduced profitability, and elevated credit risk in this period of continued monetary tightening, and accordingly Moody’s is reviewing the ratings of a select group of banks.

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The report also warns that the Federal Reserve’s policy tightening may cause broader strains on profitability and capital in the US banking sector, with negative implications for additional banks. The report summarizes the metrics that have informed Moody’s recent rating actions on select US regional and community banks. The report takes a multidimensional approach in evaluating unrealized available-for-sale (AFS) and held-to-maturity (HTM) securities losses, capital, profitability, and diversification of deposit mix, all of which makes the banks below more exposed to ALM risks than peers.

The report’s findings have significant implications for US banks and their customers. Customers may face difficulties in accessing credit, as banks may tighten their lending standards and reduce their lending volumes in response to increased risks. Customers may also face difficulties in accessing deposits, as some banks may struggle to maintain their liquidity and face deposit outflows. Customers may also face increased fees and charges, as banks may seek to offset their reduced profitability by increasing their revenues from fees and charges.

Bank NameAFS+ HTM Losses / CET1 RatioNet income / Tangible AssetsUninsured domestic deposits shareSenior Unsecured / Issuer RatingBaseline Credit AssessmentOutlook
Silvergate Capital Corporation-49.7%0.9%98.0%Cacaa3RUR
SVB Financial Group-101.1%0.8%94.5%Cc
Signature Bank-34.5%0.8%89.7%Cc
First Republic Bank-37.7%1.2%67.7%Baa1a3RUR
INTRUST Financial Corporation-91.3%1.2%41.2%Baa2baa1RUR
Western Alliance Bancorporation-20.8%1.6%57.7%Baa2baa1RUR
Comerica Incorporated-38.5%1.1%62.5%A3a2RUR
UMB Financial Corporation-51.4%1.1%75.1%A3a2RUR
Zions Bancorporation, National Association-50.8%1.0%52.5%Baa1a3RUR

Understanding of Concepts used in above table/Report

  • The AFS+ HTM losses / CET1 ratio is a measure of a bank’s financial strength and ability to absorb potential losses.
  • AFS+ stands for “available-for-sale and held-to-maturity” assets, which are two categories of investments on a bank’s balance sheet. The losses in these categories are the unrealized losses that occur when the fair value of these investments declines below their purchase price.
  • CET1 (common equity tier 1) is a key regulatory capital ratio that measures the amount of a bank’s capital that consists of common stock and retained earnings, and is considered the most reliable form of capital for absorbing losses.
  • The AFS+ HTM losses / CET1 ratio therefore indicates the extent to which a bank’s unrealized losses on its investment portfolio exceeds its available CET1 capital. A higher ratio indicates that a bank may be at greater risk of breaching regulatory capital requirements and may need to raise additional capital.
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Brief summary of the ratings listed in Exhibit 2 for each bank:

  • Silvergate Capital Corporation – Ca (senior unsecured/issuer rating) and caa3 (baseline credit assessment); Outlook: RUR (review under development). Moody’s downgraded Silvergate’s senior unsecured and issuer ratings due to concerns over the bank’s asset liability management (ALM) and increased risk exposure to digital assets. Moody’s has also placed the bank’s ratings under review for a possible downgrade.
  • SVB Financial Group – C (senior unsecured/issuer rating) and c (baseline credit assessment); Outlook: Not assigned. Moody’s did not assign an outlook for SVB Financial Group.
  • Signature Bank – C (senior unsecured/issuer rating) and c (baseline credit assessment); Outlook: Not assigned. Moody’s did not assign an outlook for Signature Bank.
  • First Republic Bank – Baa1 (senior unsecured/issuer rating) and a3 (baseline credit assessment); Outlook: RUR (review under development). Moody’s downgraded First Republic Bank’s senior unsecured and issuer ratings due to concerns over the bank’s asset liability management (ALM) and increased risk exposure to digital assets. Moody’s has also placed the bank’s ratings under review for a possible downgrade.
  • INTRUST Financial Corporation – Baa2 (senior unsecured/issuer rating) and baa1 (baseline credit assessment); Outlook: RUR (review under development). Moody’s downgraded INTRUST Financial Corporation’s senior unsecured and issuer ratings due to concerns over the bank’s asset liability management (ALM) and increased risk exposure to digital assets. Moody’s has also placed the bank’s ratings under review for a possible downgrade.
  • Western Alliance Bancorporation – Baa2 (senior unsecured/issuer rating) and baa1 (baseline credit assessment); Outlook: RUR (review under development). Moody’s downgraded Western Alliance Bancorporation’s senior unsecured and issuer ratings due to concerns over the bank’s asset liability management (ALM) and increased risk exposure to digital assets. Moody’s has also placed the bank’s ratings under review for a possible downgrade.
  • Comerica Incorporated – A3 (senior unsecured/issuer rating) and a2 (baseline credit assessment); Outlook: RUR (review under development). Moody’s downgraded Comerica Incorporated’s senior unsecured and issuer ratings due to concerns over the bank’s asset liability management (ALM) and increased risk exposure to digital assets. Moody’s has also placed the bank’s ratings under review for a possible downgrade.
  • UMB Financial Corporation – A3 (senior unsecured/issuer rating) and a2 (baseline credit assessment); Outlook: RUR (review under development). Moody’s downgraded UMB Financial Corporation’s senior unsecured and issuer ratings due to concerns over the bank’s asset liability management (ALM) and increased risk exposure to digital assets. Moody’s has also placed the bank’s ratings under review for a possible downgrade.
  • Zions Bancorporation, National Association – Baa1 (senior unsecured/issuer rating) and a3 (baseline credit assessment); Outlook: RUR (review under development). Moody’s downgraded Zions Bancorporation’s senior unsecured and issuer ratings due to concerns over the bank’s asset liability management (ALM) and increased risk exposure to digital assets. Moody’s has also placed the bank’s ratings under review for a possible downgrade.
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Additionally, banks that have relied heavily on wholesale funding or that have significant exposure to interest rate-sensitive products, such as long-term fixed-rate loans, are likely to face challenges as interest rates rise.

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The Federal Reserve’s policy of monetary tightening has contributed to a reduction in bank deposits and a weakening of bank liquidity, which has amplified challenges for some US banks in managing their asset-liability risks. Furthermore, some banks have demonstrated weak governance and oversight of ALM risk, which has further exacerbated the impact of the monetary tightening cycle.

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To address these risks, the US government has taken actions to provide support to the banking sector, including announcing support from the US Treasury and Federal Reserve to provide systemic stability. While this has been constructive in providing some stability, it does not address banks’ vulnerability to excessive interest rate risk, which was the root cause of the recent distress in some banks.

As a result of these risks, Moody’s has taken rating actions on several US banks that are particularly vulnerable to the current, deteriorating operating environment. The key risk metrics informing these rating actions include unrealized available-for-sale (AFS) and held-to-maturity (HTM) securities losses, capital, profitability, and diversification of deposit mix.

Although Moody’s has taken action on a limited group of banks, ongoing developments in the US banking sector and the broader operating environment may result in further rating actions as warranted. Banks that are heavily exposed to ALM risks, have weaker capitalization or profitability, or rely heavily on wholesale funding or interest rate-sensitive products are likely to face challenges as interest rates continue to rise.

The recent failures of Silicon Valley Bank, Silvergate Capital Corporation, and Signature Bank highlight the challenges facing some US banks in managing their asset-liability risks in a period of monetary tightening. While the US government has taken steps to provide support to the banking sector, some banks remain vulnerable to increased ALM risk, reduced profitability, and elevated credit risk. Moody’s will continue to monitor developments in the US banking sector and evaluate and take rating actions as warranted.

Summary of Moody’s Report on Banks Point wise

Here is the Point-wise summary of the Moody’s report discussed above:

  1. Moody’s Investors Service has issued a report on selected US banks, highlighting the challenges they face due to the Federal Reserve’s tightening cycle and prior risk management decisions.
  2. The report lists several banks and their respective AFS+ HTM Losses / CET1 ratios, which are indicative of potential asset-liability management (ALM) challenges.
  3. Moody’s has also provided a ratings summary for the selected banks, highlighting recent rating actions, senior unsecured/issuer ratings, baseline credit assessments, and outlooks.
  4. The report suggests that banks with high levels of unrealized losses in their available-for-sale (AFS) and held-to-maturity (HTM) portfolios may face challenges in maintaining their common equity Tier 1 (CET1) ratios.
  5. Banks with high concentrations of uninsured domestic deposits may also face ALM challenges due to the potential for sudden deposit outflows.
  6. Moody’s recent rating actions include downgrades for several banks due to concerns around ALM and credit risks.
  7. The report emphasizes the importance of effective risk management practices for banks, particularly as the Federal Reserve continues its tightening cycle and interest rates increase.

Overall, the Moody’s report highlights the potential risks and challenges facing selected US banks, particularly those with high levels of AFS+ HTM losses, high concentrations of uninsured domestic deposits, and ineffective risk management practices.

In conclusion, the Moody’s report on banking companies warns that rapid monetary tightening and weak risk management are amplifying banks’ underlying asset-liability risk. The report presents key metrics and considerations for US banks, such as unrealized securities losses, capitalization, profitability, and diversification of deposit mix. Moody’s is monitoring developments in ALM risk and may take further rating actions, as warranted. The report’s findings have significant implications for US banks and their customers, and customers should be prepared for difficulties in accessing credit and deposits, as well as increased fees and charges, as banks may seek to offset their reduced profitability by increasing their revenues from fees and charges.

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Source: Rapid monetary tightening, weak risk management amplify banks’ underlying asset-liability risk | Sector Comment | Moody’s (moodys.com)

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