Moody’s Downgrades Eleven Regional Banks’ Credit Rating

By Matis Glenn

Moody’s, an international finance research firm, downgraded 11 U.S. banks on Friday, according to The Wall Street Journal.

The Journal says that the move signals that higher interest rates and recent bank failures – the fall of Silicon Valley Bank and Signature – have brought about greater instability, especially among banks which made low-interest loans and bought low-rate securities. Moody’s said in its report that regional banks are “more exposed to hard-hit commercial real estate.”

The downgraded banks include U.S. Bancorp, which holds approximately $682 billion in assets, Bank of Hawaii, which has $24 billion, and Zions, which has $89 billion.

Western Alliance, a bank which holds $64 billion in assets, was hit harder, receiving a two-tier drop.

First Republic Bank, which faced a run last month, had its preferred-stock rating cut.

Part of the downgrade was due to some of the banks having a large amount of customers with uninsured deposits; investors are prone to withdraw such accounts amid the instability, which can trigger a self-fulfilling prophecy of a bank run.

Moody’s said that difficulties banks have in managing liabilities and assets are “becoming increasingly evident,” and are putting pressure on profitability.

Zions, Moody’s said, has “significant” unrealized losses on its securities portfolio and its capital has “deteriorated.” U.S. Bank has “unrealized losses on its securities,” and “relatively low capitalization,” according to the report.

James Abbott, Zions’ director of investor relations, criticized the report. He said that Moody’s focused too heavily on unrealized losses, and missed the “tremendous value” of Zions’ granular, low-cost deport base. “We estimate that value creates more than $5 billion as a counterbalance to the unrealized losses to the securities portfolio,” he told The Journal.

Similar to Zions, Moody’s pointed to Bank of Hawaii’s unrealized losses, and noted its reliance on funds from uninsured deposits. The report said further that it has a “somewhat elevated CRE loan portfolio.”

Bank of Hawaii said in a statement that it has “the same very strong fundamentals that Moody’s acknowledged early this year.”

Over half of Western Alliance’s accounts at the end of 2022 were uninsured deposits, according to the report, which led to an 11% outflow in the first quarter. This meant that the bank needed to be supported by higher-cost funding sources.

“While we disagree with the downgrades, we are pleased Moody’s continues to rate our deposits investment grade and recognizes our stable outlook,” A spokesperson for the bank told The Journal.

The other downgraded banks are Washington Federal, UMB Financial Corp., Associated Banc-Corp., First Hawaiian Inc., Comerica Inc., and Intrust Financial Corp.