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U.S. Banking Sector Risk Should Remain Manageable While Headwinds Persist For Certain Banks

NEW YORK (S&P Global Ratings) May 15, 2023--Following recent bank failures in the U.S., market conditions for U.S. regional banks remain volatile. Attention on unrealized losses in U.S. banks' securities and loan portfolios has increased significantly, generating concern about risks and heightening banks' sensitivity to depositor confidence.

We have reviewed our rated U.S. banks focusing on factors that we think may indicate greater exposure to risks. For instance, we have considered relative changes in deposits and funding costs, proportion of uninsured deposits, loan-to-deposit ratios, regulatory and tangible capital ratios, unrealized losses on securities and loans, and profitability.

Based on our review, earlier today we took actions on nine banks. For seven of these banks, we affirmed our ratings and revised our outlooks to negative:

  • Associated Banc Corp.
  • Columbia Banking System Inc.
  • Comerica Inc.
  • KeyCorp
  • UMB Financial Corp.
  • Valley National Bancorp
  • Zions Bancorporation N.A.

We affirmed our ratings and maintained stable outlooks on:

  • Cullen/Frost Bankers Inc.
  • East West Bancorp Inc.

We revised our outlooks on the ratings on seven banks to negative from stable, signaling we could lower those ratings if we see further risks materialize beyond what we expect. We maintained stable outlooks on the two other banks based in part on factors that we think make their overall risk commensurate with the current rating levels.

The rating affirmations on the nine banks also reflect our expectations that most are likely to dial back share repurchases for some of 2023, retain earnings, and bolster capital ratios, absent a need to grow provisions meaningfully. Please see the articles listed below for details on our actions on each bank.

Following this review, 15% of the U.S. bank holding companies we rate have negative outlooks, 85% have stable outlooks, and none have positive outlooks. The banks with negative outlooks represent 3% of the assets of rated banks in the U.S.

Notwithstanding the negative outlook revisions, at a sector level, we believe that the risks associated with funding, liquidity, and unrealized losses are generally manageable for rated banks in the U.S., given some key mitigating factors.

Overall, we believe our rated U.S. banks generally have less significant unrealized losses and depositor concentrations than the banks that have recently failed. While the unrealized losses on securities and loans of rated banks have risen materially from a year ago, their capital still well exceeds those unrealized losses.

The unrealized losses on securities of Federal Deposit Insurance Corp.-insured institutions, while still elevated, also have fallen in the last two quarters, by about 25% from their peak in the third quarter of 2022.

In addition, we think the emergency measures the Federal Reserve has taken have enhanced banks' access to liquidity and lowered the odds that banks will see unmanageable deposit outflows driving them to sell or borrow against their securities in the first place. For example, the Fed has introduced the new Bank Term Funding Program and eased the terms it offers through the discount window (its normal facility for extending liquidity to banks in need).

While we expect a drag from higher funding costs, we expect rated banks generally to produce adequate profits this year with overall earnings in the banking system not materially different from last year. Rising funding costs are likely to eat into net interest income in the final three quarters of this year compared with fourth-quarter 2022 and first-quarter 2023. Still, because quarterly net interest income rose sharply during 2022, net interest income is starting from an elevated level. We expect full-year net interest income in 2023 to be higher than in 2022, supporting overall profitability, despite some increase in provisions this year.

Related Research

Today's U.S. bank actions
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This report does not constitute a rating action.

S&P Global Ratings, part of S&P Global Inc. (NYSE: SPGI), is the world's leading provider of independent credit risk research. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 26 countries, and more than 150 years' experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information that helps to support the growth of transparent, liquid debt markets worldwide.

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