S&P Downgrades Five U.S. Banks Amid Interest Rate Concerns

Credit rating agency S&P Global Ratings downgraded five U.S. banks and lowered its outlook for several others just two weeks after rival Moody's Investor Services did the same for 10 institutions.

S&P on Monday lowered ratings for banks including Cleveland's KeyCorp., and Dallas-based Comerica Inc.

"We believe that interest rate risk management amid higher-for-longer rates will constrain profitability at KeyCorp more than at large regional bank peers," S&P wrote. KeyCorp, which has around $195 billion in assets, went down a notch to BBB from BBB+. The agency considers ratings below BBB- to be speculative grade, or junk.

S&P cited higher interest rates that have made funding costs more expensive and led to wobbles in the commercial real estate sector.

The ratings downgrades also hit Green Bay, Wisconsin-based Associated Bank Corp., UMB Financial Corp in Kansas City, Missouri, and Wayne, New Jersey-based Valley National Bancorp. The agency also lowered its outlook for Sacramento-based River City Bank and Indiana, Pennsylvania-based S&T Bank to negative, and reaffirmed its negative outlook for Zions Bancorporation in Salt Lake City.

Financial institutions are still grappling with the aftershocks of the banking crisis earlier this year, when Silicon Valley Bank and Signature Bank imploded and sparked a loss of confidence among savers, leading to a run on deposits at some regional lenders.

Meanwhile, a slew of Federal Reserve rate hikes since March 2022 has put pressure on banks to increase the rates they offer on interest-bearing accounts and products. S&P cited heightened demand from retail consumers and corporate clients of Comerica and KeyCorp, among others, for higher-yielding savings accounts as a reason for the downgrades.

While banks can replace the cash withdrawn by customers with more expensive forms of funding, such as brokered deposits, or sell-off assets, their earnings will still take a hit.

“While many measures of asset quality still look benign, higher rates are pressuring borrowers,” S&P wrote. “Banks with material exposures to commercial real estate, especially in office loans, could see some of the greatest strains.”

When Moody's lowered credit ratings earlier this month, it also warned it might downgrade others. The KBW Bank Index of major U.S. Banks has plummeted nearly 7% since Moody's announcement, on track for its worst monthly performance since the banking crisis in March.