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Tough Operating Conditions Strain Certain U.S. Regional Banks While Most Rating Outlooks Remain Stable

NEW YORK (S&P Global Ratings) Aug. 21, 2023--The sharp rise in interest rates and quantitative tightening deployed since March 2022 to combat high inflation are weighing on many U.S. banks' funding, liquidity, and spread income. These factors have also caused the value of banks' assets to fall and raised the odds of asset quality deterioration.

Deposits held by Federal Deposit Insurance Corp. (FDIC)-insured banks fell 6% between the first quarter of 2022 and the second quarter of this year. They're likely to continue declining as long as the Federal Reserve is quantitatively tightening.

Depositors have also shifted their funds into higher-interest-bearing accounts, increasing banks' funding costs. Non-interest-bearing deposits fell 23% in the last five quarters while certificates of deposits and brokered deposits--both of which tend to be higher cost--have roughly doubled, albeit from low levels.

Banks have increasingly relied on wholesale borrowings, helping to drive their funding costs up more than 40 basis points (bps) in the second quarter and more than 180 bps since the Fed began raising rates.

The decline in deposits has squeezed liquidity for many banks while the value of their securities--which make up a large part of their liquidity--has fallen. We estimate that FDIC-insured banks had more than $550 billion of unrealized losses on their available-for-sale and held-to-maturity securities as of June 30, 2023.

While many measures of asset quality still look benign, higher rates are pressuring borrowers, and nonperforming assets, delinquencies, and charge-offs are rising toward at least their historical averages. Amid higher for longer interest rates, we expect further asset quality deterioration. Banks with material exposures to commercial real estate (CRE), especially in office loans, could see some of the greatest strains on asset quality, depending on the makeup and quality of underwriting on their portfolios.

Results Of U.S. Banks Review Considering The Tough Operating Conditions

We have reviewed our rated U.S. banks focusing on risks relating to funding, liquidity, and asset quality, particularly pertaining to office CRE. We also placed a heavy emphasis on comparisons with similarly rated banks. We have considered, among other factors:

  • Changes in deposits and funding costs;
  • Loan-to-deposit ratios;
  • Dependence on wholesale funding and brokered deposits;
  • Regulatory capital ratios adjusted for unrealized losses on securities and loans (with an assumption that capital requirements for banks with more than $100 billion in assets could incorporate unrealized losses on available-for-sale securities);
  • Profitability and capacity to build capital through earnings retention; and
  • Relative exposures to CRE, particularly on office loans.

Based on our review, earlier today we took actions on 10 banks.

We lowered our ratings on the following five banks (all of which had been on negative outlooks) by one notch and assigned stable outlooks:

  • Associated Banc Corp.
  • Comerica Inc.
  • KeyCorp
  • UMB Financial Corp.
  • Valley National Bancorp

We affirmed our ratings and revised our outlooks to negative on:

  • River City Bank
  • S&T Bank

We affirmed our ratings and maintained a negative outlook on:

  • Zions Bancorporation N.A.

We affirmed our ratings and maintained stable outlooks on:

  • Synovus Financial Corp.
  • Truist Financial Corp.

We reviewed these 10 banks because we identified them as having potential risks in multiple areas that could make them less resilient than similarly rated peers. For instance, some that have seen greater deterioration in funding--as indicated by sharply higher costs or substantial dependence on wholesale funding and brokered deposits--may also have below-peer profitability, high unrealized losses on their assets, or meaningful exposure to CRE (see table). Not all banks had risks across each of those factors. The two banks we affirmed with stable outlooks had factors that mitigated some key risks, in our view.

Most U.S. Bank Rating Outlooks Are Stable

Since March 2023, we have lowered ratings on nine banks (including two that failed), revised outlooks on five banks to negative (excluding those we have downgraded), and revised outlooks to stable from positive on four others.

That said, following this review, about 90% of the banks we rate have stable outlooks while only 10% have negative outlooks and none have positive outlooks. The banks we have downgraded all have stable outlooks at their lower ratings levels.

The preponderance of stable outlooks reflects that stability in the U.S. banking sector has improved significantly in recent months, as evidenced by more modest deposit declines than feared following the bank failures of March and April 2023, continued solid earnings, and still relatively good funding metrics by historical standards. Most rated banks have manageable exposures to the riskiest parts of CRE, especially office loans, and they have taken steps to build capital and reduce risks in general.

We expect the FDIC-insured banks in aggregate to earn a relatively healthy return on equity of about 11% in 2023 even considering the rise in their funding costs. Even though net interest income (NII) is declining each quarter, NII for the full year is likely to be well above the level of 2022. In a downside case--incorporating even greater pressures from declining NIM and increasing provisions and noninterest expense--we would expect the industry to earn a return on equity in the high single digits.

Profitability will likely worsen further in 2024, but we still expect most rated banks to generate a healthy level of capital through earnings retention. Some of the banks we have taken negative actions on may face greater pressure from falling earnings given that they already have below-peer returns on equity.

We also believe most banks can manage a likely further moderate deterioration in funding. For instance, the median ratio of loans to non-brokered deposits for rated U.S. banks was 87% as of June 30, 2023, compared with modestly above 90% at the end of 2019. Net interest margins for most banks are still above where they were when the Fed began raising rates.

Furthermore, we believe the extraordinary measures U.S. regulators have taken--particularly the emergency funding programs the Fed introduced in March--have greatly supported stability, reduced confidence-sensitivity risks, and equipped banks with contingent access to substantial liquidity if needed.

In addition, the U.S. economy has shown greater-than-anticipated resilience, and S&P Global Ratings economists now expect slow growth rather than a recession. While inflation remains above target, it has declined from its peaks. Our economists believe the Fed is near the end of the rate tightening cycle, upon which it will likely hold rates flat at least through the middle of 2024--longer than previously expected.

CRE is likely to be the biggest driver of a general worsening in asset quality. That said, for the U.S. banks we rate, we believe that most have manageable exposures to CRE (meaning they're not outsize compared to capital) and have sought to lower their exposure to the most vulnerable segments, such as office. For most rated banks, we believe it would take a broader asset class decline, with charge-offs rising well above normal levels, to hurt banks' credit quality. Notably, we estimate that a 10% loss on CRE loans, which would be material, would equate to 12% of capital for FDIC-insured banks. In other words, it would take outsize losses on CRE in total to significantly eat into bank capital.

Funding, Liquidity, Asset Quality, And Economic Performance Are Key Factors To Monitor

At the same time, conditions remain fluid, and we will continue close surveillance. If funding, liquidity, asset quality, or profitability deteriorate more than we expect, or the economy slows more than our economists forecast or enters a recession, the odds of additional negative rating actions will increase.

We could also revisit ratings in conjunction with our Banking Industry Country Risk Assessment (BICRA) on the U.S. Within the BICRA, we assess economic and industry risks--both of which remain on a stable trend--to derive the anchor, or starting place, for our ratings on banks in the country.

Lastly, we could take rating actions on individual banks even outside of a larger review should idiosyncratic stresses arise or certain banks perform worse than we currently anticipate in order to maintain appropriate peer relativities.

U.S. banks' key statistics
Company Issuer credit rating % change in non-brokered deposits (1Q'23- 2Q'23)* Change in non-brokered deposits (1Q'22- 2Q'23)* Cost of funds beta (1Q'22- 2Q'23) (%)§ Loans to domestic non-brokered deposits* Cash / assets (2Q23)† Net interest margin change, YTD (pct points) Return on average equity Tier 1 ratio less unrealized losses on AFS Tier 1 ratio less unrealized losses on AFS & HTM Criticized loans / Tier 1 capital Commercial real estate loans / Tier 1 capital‡
MEDIAN (0.3) (5.1) 41.8 87.1 7.6 (0.2) 12.1 10.2 9.2 19.2 112.3

Ally Financial Inc.

BBB-/Stable 0.3 2.8 59.1 88.8 5.0 (0.3) 9.5 8.3 8.2 15.3 9.5

American Express Co.

BBB+/Stable 5.8 38.7 61.1 141.4 17.1 0.3 33.0 11.4 11.4 NA 0.1

Associated Banc Corp.

BBB-/Stable (4.5) (1.0) 47.3 108.9 1.5 (0.5) 8.4 9.2 7.9 21.7 260.2

Bank of America Corp.

A-/Stable (2.4) (10.3) 52.4 56.0 12.2 (0.2) 10.5 13.3 8.2 9.3 35.7

BMO Financial Corp.

A+/Stable (3.5) 38.8 48.0 83.5 7.6 NA 2.4 9.0 8.9 NA 105.1

BOK Financial Corp.

BBB+/Stable 0.5 (16.2) 46.5 71.7 3.0 (0.5) 12.3 9.9 9.5 7.3 150.2

Cadence Bank

BBB+/Stable (1.6) (8.3) 41.2 88.3 3.5 (0.3) 10.0 7.6 7.6 21.5 225.3

Capital One Financial Corp.

BBB/Stable (1.0) 10.7 54.8 81.2 8.9 (0.4) 10.3 11.3 11.3 13.8 100.2

Citigroup Inc.

BBB+/Stable (1.5) (2.0) 67.0 93.6 12.5 0.1 5.6 15.2 13.6 NA 21.3

Citizens Financial Group Inc.

BBB+/Stable 2.8 7.4 37.2 88.0 5.4 (0.1) 7.9 8.8 8.5 39.1 149.6

Columbia Banking System Inc.

BBB-/Negative (3.7) 43.6 30.9 96.1 6.4 (0.1) 10.8 8.2 8.2 20.9 394.3

Comerica Inc.

BBB/Stable (2.7) (19.9) 44.2 89.3 11.5 (0.8) 18.4 6.1 6.1 23.5 140.0

Commerce Bancshares Inc.

A-/Stable 1.3 (14.5) 26.9 67.1 9.0 (0.1) 19.1 10.5 10.5 9.2 106.6

Cullen/Frost Bankers Inc.

A-/Stable (3.5) (8.6) 27.4 43.2 14.4 0.1 18.7 9.5 9.1 10.4 149.1

Discover Financial Services

BBB-/Stable 1.8 18.3 54.7 116.1 6.2 (0.2) 25.8 12.2 12.1 NA 0.0

East West Bancorp Inc.

BBB/Stable 1.8 (0.5) 44.9 100.6 9.3 (0.4) 19.4 11.7 10.9 NA 262.4

F.N.B. Corp.

BBB-/Stable (1.7) (2.4) 29.2 93.9 4.0 (0.2) 9.8 9.3 8.4 37.9 228.7

Fifth Third Bancorp

BBB+/Stable 1.1 (6.6) 37.2 74.8 6.5 (0.3) 13.1 7.7 7.7 27.9 66.8

FirstBank Puerto Rico

BB+/Stable 4.4 (4.4) 19.6 71.8 5.5 (0.2) 20.2 10.5 10.4 15.3 112.2

First Citizens Bancshares Inc.

BBB/Negative (0.3) 52.7 40.0 96.3 18.5 0.7 14.0 13.5 12.6 31.1 96.7

First Commonwealth Financial Corp.

BBB-/Stable (0.9) 11.9 25.3 95.7 4.0 (0.1) 13.9 10.0 9.4 19.4 272.1

Hancock Whitney Corp.

BBB/Stable (0.5) (5.0) 31.7 81.8 3.3 (0.4) 13.2 9.2 8.6 8.7 159.8

Huntington Bancshares Inc.

BBB+/Stable 2.3 (1.3) 40.7 82.5 6.1 (0.4) 12.0 9.5 8.2 23.3 90.5

JPMorgan Chase & Co.

A-/Stable 0.1 (7.5) 45.7 65.0 12.9 0.2 19.0 15.4 13.8 7.0 65.2


BBB/Stable 0.4 (7.4) 44.7 85.2 5.1 (0.6) 8.0 7.0 6.7 21.4 116.0

M&T Bank Corp.

BBB+/Stable (0.5) 21.5 32.3 87.1 13.9 (0.1) 13.5 11.3 10.7 58.1 223.1

Morgan Stanley

A-/Stable (5.0) (20.5) 114.8 87.6 7.5 (0.0) 8.7 17.4 15.6 NA 22.4

Northern Trust Corp.

A+/Stable (4.4) (31.6) 77.3 110.3 31.7 (0.1) 11.6 12.3 10.2 3.0 51.2

OFG Bancorp

B+/Stable (0.3) (4.8) 10.0 83.2 7.6 0.5 15.9 12.9 12.2 12.1 66.3

Popular Inc.

BB+/Stable 4.6 2.9 29.7 51.7 12.8 (0.4) 9.2 10.4 10.1 19.8 133.4

Regions Financial Corp.

BBB+/Stable (1.7) (9.5) 20.1 77.9 6.9 0.0 13.7 8.7 8.6 NA 121.7

River City Bank

BBB-/Negative (3.8) 0.2 12.3 103.5 6.8 (0.2) 15.3 11.7 11.7 NA 718.7

S&T Bank

BBB/Negative (1.5) (11.3) 27.8 103.6 2.5 (0.1) 11.2 11.9 11.9 37.3 314.8

SLM Corp.

BB+/Stable 0.7 1.7 52.3 131.5 14.6 0.1 47.1 12.5 12.5 NA 0.4

Santander Holdings U.S.A Inc.

BBB+/Stable 0.3 (7.5) 77.6 108.5 9.5 (0.5) 12.9 13.2 12.3 17.0 102.8

State Street Corp.

A/Stable 2.6 (5.1) 54.2 22.3 30.5 (0.1) 12.5 13.6 8.9 3.4 19.3

Synchrony Financial

BBB-/Stable 2.0 18.0 57.0 118.7 11.8 (0.6) 16.9 13.0 13.0 NA 0.3

Synovus Financial Corp.

BBB-/Stable (0.3) (6.3) 42.3 100.6 3.3 (0.4) 14.3 8.2 8.2 23.5 270.2

Texas Capital Bancshares Inc.

BBB-/Stable 4.9 (10.0) 48.2 96.9 9.8 0.0 8.8 12.1 11.7 17.0 146.9

The Bank of New York Mellon Corp.

A/Stable 3.5 (12.6) 93.4 29.9 31.7 0.0 10.5 15.0 11.9 NA 28.3

The Goldman Sachs Group Inc.

BBB+/Stable 8.3 18.7 117.7 80.4 17.3 (0.1) 4.1 16.4 16.2 NA 15.2

The PNC Financial Services Group Inc.

A-/Stable (2.6) (5.5) 38.9 75.6 8.0 (0.1) 12.2 9.0 8.1 24.7 103.9

Truist Financial Corp.

A-/Stable (1.8) (8.1) 40.0 83.5 5.4 (0.3) 8.4 8.0 6.2 20.1 90.0

Trustmark Corp.

BBB/Stable (2.1) (5.2) 36.6 87.7 4.5 (0.3) 11.4 8.5 8.0 9.7 310.8

U.S. Bancorp

A/Stable (0.1) (6.6) 39.1 77.2 10.4 (0.1) 10.1 8.3 6.5 18.7 112.4

UMB Financial Corp.

BBB+/Stable 2.2 (8.7) 49.9 71.3 9.2 (0.4) 12.5 8.4 6.9 11.5 189.9

Valley National Bancorp

BBB-/Stable (2.7) 14.6 51.4 126.2 3.2 (0.6) 8.5 9.1 8.4 29.8 579.0

Webster Financial Corp.

BBB/Stable 2.6 2.5 40.5 92.5 1.8 (0.4) 11.2 9.9 8.6 19.5 312.2

Wells Fargo & Co.

BBB+/Stable (4.1) (13.8) 33.9 74.2 8.3 (0.1) 10.6 12.2 9.8 18.9 95.5

Zions Bancorporation N.A.

BBB+/Negative 3.2 (19.6) 37.5 86.4 2.4 (0.6) 13.3 6.3 6.3 14.7 204.6
Notes: All figures for Q2 2023 are in percentages unless otherwise noted. Issuer credit reflects holding company ratings except for Cadence Bank, River City Bank, and Zions, where we rate the commercial bank because there is no holding company, and FirstBank Puerto Rico and S&T Bank, where we only rate the commercial bank subsidiary. *Non-brokered deposits are calculated based on call report data of subsidiary banks. Loans excludes loans held in variable interest entities. §Cost of funds is the average rate paid on interest-bearing and non-interest-bearing liabilities, as calculated by S&P Capital IQ. †Cash includes interest-bearing and non-interest-bearing balances. ‡Commercial real estate loans based off regulatory Y-9 and call report data and defined as non-owner occupied CRE, construction loans, multi-family loans, and unsecured loans financed for real estate purposes. AFS--Available for sale. HTM--Held to maturity.

Related Research

Today's U.S. bank actions

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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