A couple of large corporate bankruptcies touched off concern about credit quality for U.S. banks — and, while the banks are generally capable of weathering higher losses, trust in the banking system can disappear quickly, cautions Morningstar DBRS Inc.
In a new report, the rating agency noted that U.S. regional bank stocks have faced increasing volatilty amid growing concerns about asset quality in the wake of high-profile bankruptcies of Tricolour and First Brands — events that showed up in the recent results of regional bank, Zions Bancorporation, N.A., as it took a US$50 million write-off on a US$60 million loan.
“In our view, asset quality metrics across banks have been deteriorating but have held up better than we expected. Losses have been low, so these recent and numerous larger loan issues have raised fears of a broader deterioration,” the report said.
Additionally, allegations of fraud have also raised concerns about its prevalence in banks’ loan portfolios, it noted.
At the same time, uncertain economic conditions are raising the prospect of further credit stress.
“While we expect inflation, tariff uncertainty and ongoing geopolitical risks to continue to pressure credit, especially leveraged lending, we view our rated banks as well positioned to absorb higher loan losses,” DBRS said.
However, it also cautioned that confidence in the banking system can collapse quickly, if major issues are exposed.
“Banks are involved in a confidence business as a loss of confidence can lead to a rapid withdrawal of funding, which can exacerbate existing issues,” it said.
For instance, when the U.S bank sector faced rising stress in March 2023, several banks collapsed, “driven by rapid deposit outflows that ultimately led to their failures.”
Since then, banks have taken steps to “enhance their funding profiles,” it noted.
“That said, banks have tapped the U.S. Federal Reserve’s standing repo facility for over US$15 billion over the past two days, evidencing funding stress in the system after normal repo rates jumped considerably,” it said. “We will continue to monitor usage of this facility, as well as any adverse impact on deposit funding.”