Moody’s warning on US banks wakes up optimistic investors.

Surprising Slide in⁢ U.S. Bank Stocks Raises ⁤Concerns

By ⁣Saqib Iqbal ​Ahmed and Nupur Anand

NEW YORK (Reuters) – The recent decline in U.S. ⁣bank stocks has caught traders in the options market off ⁢guard, ⁣suggesting that investors may have ‌become too comfortable with the sector. Just months ⁤ago, the banking industry was in crisis, but now it seems that some investors are ‌not adequately considering the risks.

On ​Tuesday, U.S.​ bank⁢ shares dropped after ratings agency Moody’s downgraded credit ratings of several regional lenders and placed some banking giants ​on review for potential downgrade. Moody’s warned that lenders will face ​challenges in making money due to high interest rates, increasing funding costs,‍ and the possibility of a recession. It also highlighted⁢ the risk posed by some lenders’ exposure to commercial real⁤ estate.

This warning came as a surprise to some investors. Just a‍ day ⁢before, options traders’ expectations for near-term volatility in ⁢major sector exchange-traded funds​ (ETFs) were at their lowest level since the collapse of Silicon Valley Bank in March. ⁣This indicated that investors were not concerned about the⁤ sector’s outlook. However, the recent ⁣events have caused a shift in sentiment.

Despite the increase in implied volatility, investors seem to have accepted ‍the risks in ⁢the sector and are not focused on defensive positioning.‍ Steve Sosnick, chief strategist at Interactive Brokers, believes that‌ there is ⁣less risk being priced in compared to previous periods.

While the S&P 500 Banks index⁢ has underperformed ​the broader market this year, it has rebounded significantly from‍ its lows in May. However, the recent downgrade by Moody’s serves as a reminder that risks still exist⁣ in the banking industry.

Risks ‌and Outlook

The collapse of three mid-sized U.S. banks earlier this year and record deposit​ outflows from smaller lenders ​have raised concerns about the broader banking industry. However, no further bank failures ‌and resilient economic data have​ helped⁢ restore investor confidence since May.

Nevertheless, risks remain, particularly in the commercial real estate office sector, which has been negatively impacted by the pandemic and high interest rates. Additionally, the growing cost of retaining deposits is⁢ a concern for banks. Analysts also believe that impending regulatory capital hikes may be underpriced, potentially leading to short-term capital pressure ​for some lenders.

Despite⁤ these risks, some ⁢investors view⁢ them⁣ as short-term and are optimistic about the future. Brian​ Mulberry, client portfolio manager at Zacks Investment ​Management,‌ expects ‍earnings ⁢to improve in the next 12 to 18⁢ months. He emphasizes that while there are reasons for‌ caution⁢ in the near term, he⁢ does not see this as a​ solvency issue that would cause the ‌entire banking system to collapse.

Overall, the recent events serve ‍as a wake-up call for investors who may have⁤ become complacent about the banking ​sector. It is important to remain vigilant‌ and consider the potential risks that still exist.

(Editing by ⁤Michelle‌ Price and ‍Diane Craft)

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