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Moody's cuts US banks' ratings. What's behind the drop and what to expect

Commentaries & Views

Moody's, one of the world's most respected and well-known credit-rating agencies, downgraded the credit ratings of midsize US banks and hinted that more downgrades might follow. Subsequently, the stocks of the mentioned financial companies as well as the main stock indices experienced a simultaneous decline. But let's delve into what other significant aspects might be concealed within this news.

Above all, it's crucial to consider the context. Moody's credit rating adjustments are not the first setback with the US banks in 2023. The bank sector was under intense pressure in March after the Silicon Valley Bank's bankruptcy. Later, on August 1, the Fitch agency downgraded the US credit rating from AAA to AA+. In other words, the economy and banks of the United States are going through a bad patch.

However, economic calendar comes in handy if you want to forecast how markets might react to various economic events. It ensures you're aware of the most significant reports within both global and local financial news.

Now, returning to the present. Moody's has downgraded ratings for ten US banks. Let's focus on five of them – M&T Bank, Pinnacle, BOK, Webster, and Fulton – to illustrate the drop. It's akin to perfect entry into the water during the Olympic diving championship.

You may not know much about these banks, so it's a good idea to check out the leading US stock indices – S&P 500, Dow Jones, and Nasdaq. All of them registered declines as well.

Moreover, Moody's has stated that next in line might be bigger players, such as Bank of New York Mellon and US Bancorp.

Usually, the increase in interest rates is profitable for banks due to rising loan rates. However, a combination of a sudden surge in the key rate and general instability has raised concerns about the fate of mid-size and small-size banks (remember about SVB).

These worries unveil the outflow of deposits, resulting in diminished banks' liquidity. It pressures financial organizations' profitability and capability to generate domestic capital.

Additionally, Moody's expects a mild recession in the US at the beginning of 2024. Asset and borrower quality will likely worsen, and banks holding commercial real estate portfolios may feel turbulence.

When the term "recession" is uttered, it implies that numerous markets, sectors, and domains – not just banks – might be affected. Hence, it's prudent to exercise caution in your trades and remain mindful of diversification.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.