Moody’s lowers outlook for US banking sector and puts six banks on hold

New York (CNN) Moody’s Investors Service lowered its outlook for the entire US banking sector, ranking six US banks in the wake of last week’s Silicon Valley Bank collapse.

The credit rating agency said it expects more banks to come under pressure following the SVB’s failure, particularly those with large amounts of uninsured deposits and long-term government bonds that have crumbled in value. Moody’s said it expects pressure on the banking sector to continue as the Fed continues to raise interest rates to fight inflation.

Another concern: US banks are increasing the interest they pay on savings accounts. While they hope the higher rates will make customers anxious about the collapse of the SVB, that could also hurt profits, Moody’s warned.

The good news, Moody’s said, is that the US banking system is generally healthy. It has enough cash and liquid assets to withstand an economic downturn. The bad news, at least for banks, is that US regulators may require them to hold more capital following the swift bankruptcy of the SVB.

SVB went under in a bank run, but exposure to long-dated government bonds that plummeted during the Fed’s historic rate-hike campaign exacerbated the liquidity problem. Moody’s predicts the new “tense working environment” for banks could lead some to lend less, buy back fewer shares or cut dividends to preserve capital in an emergency.

Also, at the end of Monday, the credit rating agency downgraded Bank’s signature deep into junk territory following that bank’s bankruptcy. Rating downgrades can make it more expensive for companies to borrow money.

Moody’s warned it could downgrade in the same way Bank of the First Republic (FRC), Zions (ZION), Western Alliance (WAL), Comerica (CMA), UMB Financial (UMBF) and trust financially. The company cited the “extremely volatile funding conditions for some U.S. banks exposed to the risk of uninsured deposit outflows.”

The move comes after shares of regional banks took a beating on Monday, even after the US federal government stepped in with a massive intervention designed to protect depositors and prevent further bank runs. Regional banking stocks rallied in premarket trading on Tuesday.

For San Francisco-based First Republic, Moody’s pointed to the bank’s “heavy reliance on more trust-sensitive uninsured deposit funding,” high unrealized losses in its bond holdings, and a “low level of capitalization” compared to its peers.

First Republic has a high amount of deposits above the FDIC’s insurance limit, Moody’s said, noting that this makes the bank’s funding profile “more sensitive to rapid and large deposit withdrawals.”

After a 62% plunge on Monday, shares of First Republic rose 56% Tuesday.

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