S&P downgrades 5 regional banks facing ‘tough operating conditions’

S&P Global Ratings downgraded five regional banks Monday as tremors from the banking crisis earlier this year ripple through the economy.

The ratings agency lowered ratings on Associated Banc Corp., Comerica Inc., Key Corp., UMB Financial Corp. and Valley National Bancorp while revising its outlooks to negative on two other regional banks.

S&P said Monday that “tough operating conditions” were affecting the sector, citing interest increases by the Federal Reserve.

“The sharp rise in interest rates and quantitative tightening deployed since March 2022 to combat high inflation are weighing on many U.S. banks’ funding, liquidity, and spread income. These factors have also caused the value of banks’ assets to fall and raised the odds of asset quality deterioration,” the company said in a statement.

Banks with investments in the commercial real estate sector were of particular concern to S&P amid the rise of remote work in white collar industries, which is raising questions for companies about the value of physical office space.

The lower marks follow a similar move by rival ratings agency Moody’s, which slashed rankings for 10 small- and middle-market banks while placing larger banks including Bank of New York Mellon and State Street on watch.

The collapse of Silicon Valley Bank earlier this year, which resulted in a special line of credit extended to the banking industry by the Fed, resulted in a deposit flight to larger “too big to fail” banks that became flush with cash.

The Fed has been paying attention to this friction within the banking sector.

“Stock prices for the largest banks fully recovered from their declines in the immediate wake of the failure of Silicon Valley Bank, while those for regional banks remained below the levels seen in early March,” the Fed’s interest rate-setting committee’s July minutes show.