On Monday, S&P Global Ratings slashed ratings for five U.S. regional banks, pointing to the strenuous operating atmosphere plaguing the sector since the year’s outset. The impacted banks include Associated Banc Corp., Comerica Inc., KeyCorp, UMB Financial Corp., and Valley National Bancorp. Simultaneously, the outlook for two others has been dimmed to negative.

Turbulent Waters: Regional Banks Face Downgrades, Challenges Mount in 2023

The five downgrades underscore the hurdles regional banks navigated in 2023, especially after Silicon Valley Bank’s (SVB) dramatic collapse in March. This significant failure hastened deposit withdrawals, with patrons migrating to bigger institutions, inducing notable funding strains for many regional entities.

S&P’s statement elaborated, “Interest rates have surged, and since March 2022, quantitative tightening measures aimed at curbing intense inflation are burdening numerous U.S. banks in terms of funding, liquidity, and spread income. Such dynamics have precipitated a dip in banks’ asset value, elevating the risk of asset quality degradation.”

Amidst aggressive competition from national giants, regional banks grapple to safeguard deposits, denting their profitability. For instance, S&P spotlighted Comerica’s stark $14 billion annual plunge in average deposits. Moreover, the evolving remote work landscape, which casts doubt on office space necessity, amplifies the ratings agency’s apprehensions about banks’ commercial real estate exposure.

Echoing this sentiment, Moody’s had similarly downgraded 10 regional banks earlier in the month. Such consecutive downgrades accentuate the growing disparity between mammoth national banks and their petite regional peers. Post the Silicon Valley debacle, while the top-tier banks have impressively bounced back, their regional contemporaries continue to wrestle with adversity.

Although a bulk of the banks S&P assesses sustain stable outlooks, those shadowed by negative forecasts have surged to 10%. The probability of asset quality erosion is on the rise, as highlighted by the credit agency. In the backdrop of witnessing three of history’s largest U.S. bank failures this year, S&P recommends regional banks amplify their liquidity and capital reserves to stay afloat amidst these “tough operating conditions.”

Aligning with this downgrade is a recent briefing by the U.S. Federal Deposit Insurance Corporation (FDIC) spotlighting 2023’s banking perils. Capping off July, the FDIC also shuttered Tri-State Bank, marking yet another U.S. bank’s downfall.

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