S&P Global Downgrades Five US Banks, Warns Lenders Hold Billions of Dollars in Loans That May Face ‘Material Deterioration’

Standard & Poor's (S&P) has downgraded five more regional banks as the pain in the sector continues to spread. In a new outlook report, S&P says it's downgrading First Commonwealth Financial Corp., M&T Bank Corp., Synovus Financial Corp., Trustmark Corp. and Valley National Bancorp.

All five banks were downgraded to "negative" from "stable." S&P says the banks' exposure to the troubled commercial real estate (CRE) market is the potential harbinger of weakness ahead. "Stress in commercial real estate (CRE) markets, such as reduced property prices and higher vacancies particularly for investor-owned office properties, has created a rising challenge for banks with sizable loan exposures to CRE... While most rated banks haven't reported a sharp rise in delinquent and nonaccrual CRE loans, increases in criticized and modified loans and increasing loan maturities may foreshadow an eventual material deterioration in asset quality and performance."

According to S&P, M&T stands out as the bank with one of the worst exposures to CRE, noting that "further deterioration" is now possible for the bank as it struggles to service over $33 billion in loans to the sector. Office loans in particular – a weak point ever since the Covid-induced normalization of remote work – make up a sizeable part of M&T's loan portfolio. S&P says such loans are "vulnerable to unfavorable long-term secular trends." Last month, IMF insider Desmond Lachman warned that CRE is a clear Achilles heel for the industry that could result in the failure of around 385 small and medium-sized banks.