Moody's lifts outlook on four big regional banks to stable from negative

By Steve Gelsi

Fifth Third Bancorp, First Citizens, Regions Financial and Huntington Bancshares draw positive ratings moves

The debt outlook for Fifth Third Bancorp, First Citizens Bancshares Inc., Regions Financial Corp. and Huntington Bancshares Inc. has been raised to stable from negative by Moody's on healthier balance sheets from the four big regional banks.

The move came ahead of Wednesday's 50-basis-point interest-rate cut by the U.S. Federal Reserve, which could lead to an uptick in the economy.

The quick rise of interest rates in 2022 and 2023 affected the balance sheets of banks as the cost of borrowing increased and chilled loan activity, but now those clouds are starting to break up, at least in terms of the banks' credit ratings.

The ratings moves by Moody's, which it made on Monday, came as bond prices have moved up as the bank's debt has become more desirable to investors (see chart below).

At the same time, the spread on yields compared with U.S. Treasurys has been coming down for the group (see chart below).

Fifth Third draws praise for improved capitalization

Moody's analyst Allen Tischler said Fifth Third's (FITB) ratings boost stems from its improved capitalization, along with a balance sheet enhanced by strong liquidity, a large core deposit base and minimal credit concentrations, as well as sound profitability.

Rising deposit costs are offsetting these strengths, as well as the costs associated with the expansion of its Southeastern U.S. operations.

"Fifth Third's stable outlook reflects our assessment that the diversification benefits associated with its expansion will be realized and that its improved capital profile will endure," Tischler said in a note dated Sept. 16.

First Citizens wins kudos for its acquisitions

First Citizens (FCNCA) drew praise for the integration of its acquisition of commercial lending company CIT Group Inc. in 2022, as well as its purchase of the remnants of Silicon Valley Bank in 2023.

"These two transactions grew First Citizens' balance sheet by a factor of four in about 15 months, which posed outsized integration risks," Tischler said. "Since the close of these acquisitions, First Citizens' financial performance has been robust, its enterprise risk-management capabilities have strengthened, and it has continued to operate with a level of capitalwell above the peer average."

The bank's baseline credit assessment of Baa1, while still investment grade, is still lower than most other regional banks' due to its ongoing integration risk, he said.

For example, Fifth Third's baseline credit assessment is a3, which is one notch higher than that of First Citizens.

Regions Financial's upgrade 'reflects its very strong deposit base'

Regions Financial (RF) is seen by Moody's as offering a "very strong" deposit franchise, as well as "sound profitability" and a risk profile that remains conservative.

While Moody's stable outlook for Regions Financial reflects its expectation that the bank's improved capital profile will prevail, its capital structure poses a "relative weakness" to its creditworthiness despite improvements in the past 18 months, Moody's said.

"Regions' profitability benefits from its strong franchise, strong funding profile, and revenue diversification," Moody's analyst Stephen Lynch said in a note.

Huntington's sound profitability gets praise

Tischler said Huntington (HBAN) maintains a "sizable and largely insured core deposit base" as well as a relatively safe asset-risk profile and robust liquidity and profitability that has remained "sound."

Its challenges include deposit costs that are higher than most of its peers', as well as its "significant reliance" on net interest income.

However, the bank's outlook upgrade to stable from negative reflects Moody's view that the bank's improved capital profile will endure, Tischler said.

-Steve Gelsi

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09-18-24 1552ET

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