Global financial markets and banking sectors are facing the same disruptions that occurred a few months ago. The turmoil follows Moody’s decision to lower ratings of several small and medium-sized banks in the United States. This action has sparked concerns regarding the possibility of downgrades for some of the country’s major banks.
Ratings
Following the recent attention garnered by Fitch Ratings, Moody’s rating has now taken the spotlight, significantly impacting the markets. The agency cautioned that the credit strength of the banking sector in the US is likely to be tested, due to risks associated with financing and decreased profitability.
Moody’s agency downgraded the ratings of 10 banks by a single level. Additionally, it has initiated a review process for 6 other banks, including major ones, with the potential for future downgrades. Notably, Bank of New York Mellon, US Bancorp, State Street Corporation, and Trust Financial Services face possible downgrades.
In its memorandum, Moody’s states, “The second quarter results of several banks in the United States have shown increasing pressure on profitability, which could diminish their ability to generate internal capital, at a time when a mild recession in the United States is looming in early 2024.”
The agency further clarified that asset quality may decline alongside risks related to some banks’ commercial real estate portfolios. Moody’s shifted its future outlook to negative for 11 major banks within the United States, including Capital One Financial, Citizens Financial Group, and Fifth Third Bank.
Last week, Fitch surprised American officials, and the markets, by downgrading the United States’ credit rating from AAA to AA+.
European banks face a period of instability
In parallel, European banks encountered a challenging day due to an announcement by the Italian government. They revealed their intention to impose a 40 percent tax on banks’ excess profits, a result from increased interest rates. This sudden decision had an immediate impact on stock prices, causing them to decrease within the financial markets.
The 40 percent tax will be applied in two ways. Firstly, it will be subtracted from a portion of the net interest income for the year 2022, provided it exceeds the amount from the financial year 2021 by at least 3 percent. Secondly, it will be levied on profits in 2023, with a minimum threshold set at 6 percent. It’s important to note that the extraordinary tax amount must not surpass a rate equivalent to 25 percent of the bank’s net asset value.
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Italian taxes
Italian banks had recorded substantial profits due to the increases in interest rates. The five largest banks in Italy announced a combined profit of $10.5 billion in the first half of 2023, marking a 64 percent annual increase, according to rating agency DBRS Morningstar.
Italy’s largest bank, Intesa Sanpaolo, stated at the end of last month that it expects to generate over €13.5 billion this year from net interest margins alone.
The Italian Prime Minister intends to raise funds for the 2024 budget project, which might face a deficit due to the sudden decline in the Gross Domestic Product by 0.3 percent in the second quarter of the year.
This tax could contribute to collecting more than €2 billion, according to preliminary estimates reported by the Italian press.
The revenues from this tax will be deposited into a fund to finance measures aimed at reducing the tax burden on households and businesses.
The government’s announcement surprised both the sector and analysts. Experts from Banca Akros commented, “This is unexpected and unfavorable news that is generating negative reactions in the markets.” They believed that banks’ profits per share would decrease by an average of 7 percent, as reported by the French Press Agency.
Last year, the Spanish government imposed an exceptional tax on banks, applicable in 2023 and 2024, which drew criticism from the European Central Bank. The ECB expressed concerns about, “possible negative consequences,” on the sector.
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