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NEW YORK (Reuters) -Ratings agency Moody’s (NYSE:MCO) said the U.S. banking sector is still strong even after it downgraded some small- to mid-sized lenders and warned it might cut the ratings of several major banks.
“What we’re doing here is recognizing some headwinds – we’re not saying that the banking system is broken,” Ana Arsov, managing director of financial institutions at Moody’s, told Reuters in an interview.
An S&P index of bank stocks slid 2% after Moody’s took action on 27 lenders on Monday, highlighting the challenges of higher interest rates, climbing funding costs and a looming recession that would weigh on profits.
“As you look ahead, it doesn’t feel like the pressure from interest rates being higher and overall monetary policy tightening is close to abating,” said Jill Cetina, an associate managing director at Moody’s.
The rating changes stemmed from the likelihood that bank profits will shrink in the coming quarters, Arsov said. As the economy worsens, more borrowers will fall behind on loan payments and eventually default.
“Losses can only go up from now on,” Arsov added, in areas such as consumer loans and commercial real estate.
Bank profit margins will continue to be compressed as they pay higher rates to customers to retain deposits.
“We’ve seen funding strains in the banking sector,” Cetina said. “The interest rate risk, I think, was something that the U.S. banking sector was not prepared particularly well for, and because of that, we have some challenges at certain banks.”
