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Banks are not out of the woods yet

Companies and Markets

By Sean Ryan  |  August 14, 2023

Moody’s downgrades several banks (again)

Fresh ratings actions on interest rate and CRE concernsnot new news, yet significant. Last week, for this first time since the spring, Moody’s downgraded 10 regional banks. It also placed six other, mostly larger banks—including two G-SIBs—on review for potential downgrades, and it changed the outlooks on 11 other regional and superregional banks from Stable to Negative. On one hand, in August 2023, the fact that banks face risks related to commercial real estate exposure and higher interest rates does not qualify as a proprietary insight. People who read Moody’s report and decided “there’s no new news here” weren’t wrong. On the other hand, as hope for a soft landing waxes, it serves as a useful reminder that the financial system is already facing significant challenges that, while perhaps manageable, constrain its ability to manage through whatever incremental challenges may arise. It’s always the risk layering that kills you.

Figure 1: Banks downgraded by Moody’s


Source: Moody’s

Figure 2: Banks placed on review for potential downgrade by Moody’s


Source: Moody’s

Figure 3: Banks with outlook changed from Stable to Negative by Moody’s


Source: Moody’s

KKR-Synovus transaction highlights private credit opportunities

KKR portfolio acquisition highlights opportunities for alt asset managers. Last week, KKR announced the acquisition of $373 million of prime auto loans from Synovus. This is not a large transaction for either party—the auto portfolio represents about 0.89% of KKR’s total asset-based finance AUM, and 0.84% of Synovus’ total loans (though 31% of Synovus’ non-mortgage, non-credit card consumer loans). While stressed situations such as at PacWest may produce private equity opportunities, however, this transaction is more reflective of the majority of opportunities alternative asset managers are likely to find in the banking system. Whether driven by a desire to deleverage the balance sheet, manage interest rate risk, or reshape credit exposure (while this was a prime portfolio, COVID and its sequelae have left the auto finance complex in a very strange place, and there is good reason to believe that loans will not perform in the next downturn in the way historical models might predict), banks are likely to continue to offer opportunities to private credit funds.

Cumulative deposit betas keep rising

When does bad news become good news? Figure 4 shows the cumulative deposit betas for total non-interest-bearing deposits (relative to the average effective Fed Funds rate for each quarter) across this tightening cycle for a universe of large- and mid-sized banks. While these are likely to only grind higher through the remainder of 2023, both the dispersion and the prospect of Fed easing in 2024 suggest that at some point in the not-too-distant future the first shall be last, and the last shall be first. Either the banks that have sustained low cumulative betas begin to catch up to their peers, or Fed easing enables the higher-beta banks to reduce deposit costs more (or both). To be clear, that doesn’t translate directly into an investment thesis; there are plenty of reasons beyond pricing power (or lack thereof) that lead to these betas; loan demand and organic deposit runoff to name only the most obvious.

Figure 4: Cumulative deposit betas (total non-interest-bearing deposits)


Source: FactSet

Little change in online savings rates

Bread Savings ups its rate by 10bps. Among the universe of online banks we track, the top rate remained 5.00%, but Bread Savings joined the cohort of banks offering it, raising their rate by 10bps. The most noteworthy non-change remained Apple, which continues to hold the line on its original offer of 4.15% despite 50bps of increases to the Fed Funds rate, and a 15bps increase in the online rate offered by its partner on their savings account, Goldman Sachs.

Figure 5: Savings account interest rates offered by selected online banks


Source: FactSet, BestCashCow.com

Interest rates

Unchanged 2-10 spread, Fed Funds incrementally more hawkish. The 2-10 spread was flat last week, ending up back at -73bps. Fed Funds futures turned a bit more hawkish, as illustrated in Figure 9, with the implied probability for the May 2024 FOMC meeting flipping back from a 25bp cut to no change.

Figure 6: The Yield Curve Remains Inverted


Source: FactSet

Figure 7: The 2-10 spread was flat last week at -73bps


Source: FactSet

Figure 8: Fed Funds futures turned slightly less dovish


Source: FactSet

Figure 9: Fed Funds Futures imply a rate cut in March 2024


Source: FactSet

Weekly Federal Reserve balances

August 9 Federal Reserve borrowings keep rising. Total bank borrowings (BTFP combined with the Discount Window) rose 1.1% to $108.8 billion. Money market fund balances rose 26bps to $5.53 trillion, while large US banks saw deposits increase by 76bps (and are down 13bps QTD). Total loans in the banking system rose 8bps (and are now up 29bps QTD).

Figure 10: Federal Reserve balances


Source: FactSet

Figure 11: Bank Term Funding Program usage reached another new peak last week


Source: FactSet

Figure 12: Money Market Fund assets hit a new high last week


Source: FactSet

Figure 13: Deposits rose for banks large and small last week


Source: FactSet

Figure 14: Total loan growth remains very sluggish


Source: FactSet


This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.


Sean Ryan, CFA


Mr. Sean Ryan is the VP/Director for the banking and specialty finance sectors at FactSet. In this role, he guides the development of FactSet’s deep sector offering in these areas. He joined FactSet in 2019 and prior to that, he covered bank and specialty finance stocks for brokers including Lehman Brothers and Bear Stearns and for sector-focused hedge funds FSI and SaLaurMor Capital. Mr. Ryan earned a Bachelor of Science in industrial and labor relations from Cornell University. He is a CFA charterholder.


The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.