Moody’s Downgrades 11 Regional Banks, Including Zions, U.S. Bank, Western Alliance
The recent failures of Silicon Valley Bank and Signature brought attention to regional lenders’ weaknesses
Moody’s Investors Service downgraded 11 regional lenders Friday, suggesting higher interest rates and recent bank failures have ushered in greater instability.
The downgrades hit lenders including U.S. Bancorp, USB -3.57% with some $682 billion in assets, Zions Bancorp, ZION -5.69% with $89 billion, and Bank of Hawaii Corp. BOH -1.77% , with $24 billion.
Western Alliance Bancorp, WAL 2.63% one of the banks hardest hit by regional banking turmoil, received a two-notch downgrade. First Republic Bank, which faced a run last month, had its preferred-stock rating cut.
The failures of Silicon Valley Bank and Signature Bank last month focused attention on weaknesses among regional banks, many of which made low-interest loans and bought low-rate securities. Some have a high share of customers with uninsured deposits that became flightier when the turmoil hit.
The rating agency said strains in the way banks are managing their assets and liabilities are becoming “increasingly evident,” and are pressuring profitability. Recent events “have called into question whether some banks’ assumed high stability of deposits, and their operational nature, should be reevaluated,” the ratings firm said in its report.
Regional banks, Moody’s said, are more exposed to hard-hit commercial real estate. U.S. banks hold about half of total CRE debt outstanding, and some are concentrated in construction, office, or land development.
U.S. Bank has a “relatively low capitalization” as well as unrealized losses on its securities, Moody’s said. On an earnings call this week, executives said the bank’s capital levels fell because of a recent acquisition but they expect to rebuild it over the course of this year and next.
Zions has “significant” unrealized losses on its securities portfolio and its capital has deteriorated, Moody’s said.
The ratings firm’s focus on unrealized losses misses the “tremendous value” of Zions’s granular, low-cost deposit base, said James Abbott, the bank’s director of investor relations. “We estimate that value creates more than $5 billion as a counterbalance to the unrealized losses to the securities portfolio,” he said.
Bank of Hawaii similarly has unrealized losses and is reliant on uninsured deposit funding, Moody’s said. It also has a “somewhat elevated CRE loan portfolio.” The bank said in a statement that it has “the same very strong fundamentals that Moody’s acknowledged early this year.”
Moody’s said that more than half of Western Alliance’s deposits were uninsured at the end of 2022, leading to an 11% outflow in the first quarter. That forced the bank to rely on higher-cost forms of funding.
A spokeswoman for the bank said: “While we disagree with the downgrades, we are pleased Moody’s continues to rate our deposits investment grade and recognizes our stable outlook.”
First Republic suspended payments of quarterly cash dividends on its preferred stock earlier this month. It has also lost tens of billions of dollars in deposits, forcing it to rely on high-cost borrowing that is likely to squeeze its profits, the rating agency said.
The other downgraded banks are Associated Banc-Corp. , Comerica Inc., First Hawaiian Inc., Intrust Financial Corp, Washington Federal Inc. and UMB Financial Corp.