Ahead of First Republic Bank’s Earnings Report Today, Moody’s Paints a Bleak Outlook
banks are actually going to have to start competing for deposits by paying bank customers a decent yield, instead of bragging about their great franchise
By Pam Martens and Russ Martens
All of those pundits who have written over the past two weeks that the banking crisis is over, have failed to persuade the big credit ratings agency, Moody’s. Last Friday, Moody’s downgraded the credit ratings of 11 banks and put another five banks on negative watch – all in one day. And, for good measure, it downgraded the entire U.S. banking system from “Very Strong –” to “Strong +.”
While not mentioning the Federal Reserve directly, the Moody’s downgrade of the U.S. banking system seemed to point directly at the Fed’s unrelenting interest rate hikes. Moody’s wrote:
“Moody’s has lowered the macro profile of the US banking system to ‘Strong +’ from ‘Very Strong –.’ The change in funding conditions reflects rising asset liability management challenges at US banks. Specifically, the banking system faces rising funding and profitability pressures related to the significant and rapid tightening in monetary policy, which has led to a reduction in US banking system deposits and higher funding costs. Higher interest rates have also reduced the value of US banks’ fixed rate securities and loans which increases their liquidity and capital risks.”
In simple terms, banks are actually going to have to start competing for deposits by paying bank customers a decent yield, instead of bragging about their great franchise and offering a fraction of one percent on deposits while big mutual fund companies are offering close to 5 percent on government money market funds. (See our report: The Banking Crisis Knock-On Effect Has Been a Stampede into Government Money Market Funds – Foiling the Fed’s Effort to Raise Market Interest Rates.)
This raises the dilemma the Fed now faces after too many unprecedented years of ZIRP (Zero Interest Rate Policy): kill inflation or kill the banks.
First Republic Bank, which is set to report earnings and the extent of its deposit shrinkage after the market closes today, was one of the 11 banks impacted by Moody’s downgrades on Friday. Moody’s downgraded its preferred shares deeper into junk territory, to CA from Caa1.
First Republic Bank is the west coast bank that U.S. Treasury Secretary, Janet Yellen, and Jamie Dimon, Chairman and CEO of JPMorgan Chase, set out to “rescue” in mid-March with the dumb idea of putting $30 billion more of uninsured deposits from the mega banks on Wall Street into the sinking bank. (One of its key problems at the time was that First Republic Bank already had too many billions of uninsured deposits. The FDIC caps federal deposit insurance at $250,000 per depositor per bank.)
After that “rescue” mission occurred on March 16, S&P Global downgraded the bank deeper into junk territory and the share price of First Republic Bank continued to collapse. First Republic’s stock has lost 90 percent of its value over the past year.
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