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Moody’s Rating Cuts on 10 Banks Send Tremors Through Sector

By Jake Beardslee · August 8, 2023

Moody's credit downgrade of 10 regional banks sparked debate over divergent outlooks for large versus small banks.  Szmenderowiecki/Wikimedia

Moody’s cut credit ratings for several mid-sized and regional banks, while putting larger banks like US Bancorp on watch. Yesterday’s move sparked debate among market experts over the outlook for bank stocks.

Sarat Sethi of advisory firm Douglas C. Lane & Associates told CNBC that downgrades were “old news” and “should have come out in the first quarter.” Instead, he sees opportunities, saying, “US Bancorp is not a small mid-size bank. It is one of the largest banks out there… I like the large-cap banks and some of them are on sale today.”

Stephanie Link of Hightower, however, held a more cautious view on regional banks, telling CNBC, “I think the regional banks are going to be in a world of hurt for quite some time. They’ve got to increase their capital levels right from Basel III endgame. They also have a high concentration in commercial real estate.” Link said she prefers large banks like Morgan Stanley and Bank of America.

Bryn Talkington of Requisite Capital Management agreed with Link’s assessment, saying “I continue to think that the smaller banks are going to be anesthetized because… [their] deposits are under siege.” She believes that July’s regional bank stock rally is now unwinding.

The downgrades have sparked a vigorous debate on the attractiveness of regional versus large-cap banks in in a cloudy economy. While some see opportunities, others urge caution on the smaller operators. As a result, the path forward for bank stocks appears to remain uncertain.

Light Wave commentary

Moody’s downgrades underscore the diverging fortunes between large and small banks in a lumpy economy. While major banks like JPMorgan and Bank of America have the scale and diversification to ride out economic uncertainty, regional and community banks face a more precarious road ahead. Their high concentration of loans in commercial real estate leaves them vulnerable to a softening office marketplace

This bifurcation in the banking sector will likely continue, with large banks taking market share from struggling smaller players as consumers and businesses flock to safety.

It would seem not all banks are created equal.