Stock Market Slumps Amid S&P’s Bank Downgrades

The stock market, already trending downward, fell further Tuesday as S&P Global Ratings downgraded the credit ratings of five banks, including two of the biggest U.S. lenders, Comerica and KeyCorp.

The action comes two weeks after Moody’s Investors Service downgraded 10 regional U.S. lenders. That move also spooked the market, which had assumed the banking system’s problems, notably the spring collapse of Silicon Valley Bank and two other small institutions, were over.

Bank stocks were hit the hardest Tuesday, suffering even more than after the Moody’s downgrades. The KBW Bank Index dropped 2.6% (more than the 1.2% it lost two weeks earlier), and the KBW Nasdaq Regional Bank Index fell 2.7%% (compared with the prior 1.4% drop).

The S&P 500 did not suffer as much this time, slipping just 0.28%, versus negative 0.4% two weeks back.

The banking downgrades come amid the Federal Reserve’s 11 interest rate increases, which have crimped profitability and led to deposit flights from some lenders.

“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,” S&P commented in its report. “These factors have also caused the value of banks’ assets to fall and raised the odds of asset quality deterioration.”

The five downgraded banks each were pushed down one notch but remain investment grade, albeit in the lowest category before junk. On Tuesday, their shares slumped between 2% and 4%. The two largest, KeyCorp (No. 20 in the U.S. with $193 billion in assets, per the Fed’s list) and Comerica Inc. (No. 31, $90 billion), now are BBB.

The other three downgraded banks are Valley National Bancorp (No. 37, $61.7 billion, now BBB-), Associated Banc Corp. (No. 49, $41 billion, BBB-) and UMB Financial Corp. (No. 50, $41 billion, BBB+). 

Of the five S&P downgrades, only one also was demoted by Moody’s: Associated.