Regional Banks: S&P Moves, No Big Surprises

Peter Simon, CFA – Senior Analyst - North American Banks and Brokers
Iris Shi, CFA – Analyst - U.S. Banks

  • S&P downgraded several regional banks, mostly consistent with outlook revisions it had made a quarter ago; however most of its regional bank ratings were unchanged and stable.
  • S&P’s actions were far less dramatic compared to Moody’s a few weeks ago; ~90% of the sector remains on stable outlook, with S&P highlighting still-solid earnings capacity and sound credit quality as important risk mitigants.
  • CMA and KEY were downgraded to BBB from BBB+, with the outlook moved to stable. Both companies had a negative outlook from S&P dating back to May.
  • Truist was affirmed at A-, as its relatively lower capital levels should replenish over time given solid earnings capacity. We are more in agreement with S&P’s stance on TFC and USB’s ability to rebuild capital levels through earnings compared to Moody’s rationale for reviewing both names for downgrade.
  • Fitch recently noted that if the “operating environment score” that flows into bank ratings changed, a number of downgrades would likely ensue including among several of the largest banks. However, the operating environment score is currently stable and was already downgraded one notch back in June.

S&P followed in Moody’s footsteps in concluding a review of bank ratings following the 2Q23 earnings season. The results were far less dramatic than Moody’s in terms of the number of actions; in general, we view S&P’s actions as fairly unsurprising adjustments related to company and sector operating conditions and fundamentals–and consistent with S&P’s previous commentary and outlook revisions–whereas Moody’s actions appeared to be more of a shift in methodology and a “catch-up”exercise after it had rated smaller and mid-sized banks too highly coming into 2023.

S&P’s review focused on 10 banks it viewed as vulnerable to current operating conditions, and as a result of its review it downgraded KeyCorp (to BBB from BBB+), Comerica (to BBB from BBB+), Associated Bancorp (BBB- from BBB), UMB Financial (BBB+ from A-), and Valley National (BBB- from BBB). S&P affirmed Truist and Synovus with stable outlooks, and affirmed Zions Bancorporation at BBB+ but kept a negative outlook.

The banks included in the review were largely the same banks included in outlook revisions that were released in mid-May; at that time, S&P changed the outlook for KEY and CMA to negative from stable (though neither was on review for downgrade). Previously S&P also moved USB down a notch to A from A+ following 1Q23 earnings. Below we discuss the actions on TFC, CMA, KEY, and ZION.

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