Macro Insights: US regional banks on notice again

Macro 4 minutes to read
Charu Chanana

Chief Investment Strategist

Summary:  It may be too soon to have put the US regional banking sector concerns on a backburner. While the bank ETFs rose after hitting their lows in early May, concerns are coming back to the sector with rating downgrades and negative watch announcements. Increasing funding risks and weakening profitability will translate into tighter lending standards from US banks, suggesting risks to the US economy at a time when consumers are also running out of pandemic-era savings.


Ratings agency S&P Global announced a cut in its credit ratings on some regional lenders with high commercial real estate (CRE) exposure. The move follows downgrades of several mid-sized banks and their outlooks by Moody’s a couple of weeks back and is another reminder that the March banking sector crisis is not yes completely behind us. The S&P has warned about the implications of high interest rates on the banking sector and sees risk from rising funding costs and eroding profitability. An analyst from Fitch Ratings had also warned that the entire banking industry could be downgraded to A+ from AA-, which could trigger cuts for some of the country's largest banks and sweeping downward adjustments for their smaller rivals.

The rating agency lowered ratings for Associated Bank (ASB), Comerica (CMA), Key Bank (KEY), UMB Financial Corp (UMBF), and Valley National Bancorp (VLY). It also revised outlooks for River City Bank and S&T Bank (STBA) to negative while maintaining a negative outlook for Zions Bancorporation (ZION). As a result, the SPDR S&P Regional Bank ETF (KRE) fell 2.9%, slipping below the 38.2% retracement level from the May low.

The banking sector, once again, is facing several pressures:

  • Higher interest rates have forced banks to pay more for deposits. Smaller regional banks have been impacted in a large way further since the March crisis as depositors rushed to move their deposits to safer large banks.
  • High yields continue to translate into unrealized losses on Treasury and other bond holdings for banks and erodes their liquidity position. Fed’s special assistance program announced in March, which allowed banks to swap highly rated long-term securities that were under water in exchange for a 12-month cash loan equal to the face value of the paper, continues to be in demand.
  • Weakening loan demand in the wake of high inflation and interest rate environment.
  • Loan losses are also escalating, and US banks suffered almost $19bn of losses on soured loans in Q2 amid rising defaults among credit card and commercial real estate borrowers.
  • Exposure to commercial real estate, particularly the office sector, is continuing to haunt. Working from home has cut into office values and almost $1.5 trillion of commercial property debt is due for repayment before the end of 2025. Meanwhile, rising interest rates have made many properties less valuable.

With event risk from Jackson Hole ahead, all eyes are on whether Fed Chair Powell acknowledges these risks to the banking sector and the impending credit risks to the US economy as a whole. Given the structural nature of these issues, and a structural focus of the symposium that is to be held at the end of this week, there is reason to believe that we could get comments on the operating environment of banks. Even if the Fed continued to emphasize higher-for-longer interest rates, banks will likely still face pressure from higher funding costs and weak loan demand, while also suffering on their balance sheets from asset/liability mismatch.

These rating downgrades could translate into tighter lending standards, and that could be detrimental to the health of the US economy particularly the high yield sector. The latest Senior Loan Officer Opinion Survey (SLOOS) showed that lending standards tightened across nearly all categories in Q2 for the fourth consecutive quarter. Survey respondents expected further tightening ahead, particularly in commercial real estate, credit cards, and commercial and industrial loans to small firms.

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.