Bank stocks can’t catch a break—and the actions taken by Moody’s Investors Service may have provided investors with a buying opportunity.
Everything was looking good for bank stocks following the turmoil that occurred in March. The
SPDR S&P Bank ETF
(ticker: KBE) and
SPDR S&P Regional Banking ETF
(KRE) had both rallied out of the trading hole they entered during the sector upheaval, and even looked set to break higher. Then Moody’s stepped in late Monday with ratings downgrades on 10 lenders, while putting six lenders on review for downgrade, and giving negative outlooks to 11 banks.
That sent the SPDR S&P Bank ETF and SPDR S&P Regional Banking ETF down 4% and 4.3%, respectively, in early trading Tuesday with shares of some of the affected banks faring even worse.
Bank of America
(BAC), down 3%, and
JPMorgan Chase
(JPM), down 1.8% were dropping, despite not being mentioned.
While it is understandable that the rating actions would weigh on the bank stocks, the timing and rationale of the ratings were curious. Among the risks cited by Moody’s were rising funding costs, lower regulatory capital on hand at regional banks, the chance of commercial real estate defaults, and the possibility of a recession. It even cited a possible economic slowdown as a concern.
“We continue to expect a mild recession in early 2024, and given the funding strains on the U.S. banking sector, there will likely be a tightening of credit conditions and rising loan losses for U.S. banks,” Moody’s said.
Those risks shouldn’t be taken light, but Moody’s isn’t telling anyone what they don’t already know following the collapse of Silicon Valley Bank and others this past spring. Since then, banks have survived two earnings cycles and the Federal Reserve’s annual stress tests, which helped assure Wall Street of their durability, while many regional banks also opted for intra-quarter updates as well. Wall Street analysts appear on top of the matter as well, having already cut their earnings forecasts for the SPDR S&P Bank ETF by 16% over the past 12 months, and for the Regional Bank ETF by 24%.
Moody’s may have been prompted by action was rival ratings firm Fitch’s downgrade of U.S. government debt. “When the sovereign goes down, everything else in the world or ratings that depends upon it goes down, GSIBs, GSEs, agencies, etc.,” Chris Whalen, chairman of Whalen Global Advisors wrote Tuesday. Puzzlingly, Moody’s still has a AAA rating on the U.S.
Just as economists largely brushed off the impact of the downgrade of U.S. debt, it may make sense to similarly dismiss Moody’s actions on these 27 banks. Despite headwinds, banks have been able to show their resilience in recent months. While higher interest rates have meant higher funding costs, they also spurred double-digit profit gains at many banks including JPMorgan (JPM), Bank of America (BAC), and Wells Fargo (WFC). Bank stocks even shrugged it off when regulators announced plans for stricter capital rules last month.
Watching bank stocks tumble, it’s easy to forget that banks have taken several hits over the past few months—three major collapses, higher funding costs, concerns of a weaker economy, and the prospect of stricter regulation—and managed to regroup and march higher.
There’s little reason to believe that this time will be different.
-Brian Swint contributed to this article.
Write to Carleton English at [email protected]
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