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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
EXECUTIVE SUMMARY
- 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.
FINANCIAL METRICS
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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