Moody's changes outlook on U.S. banking sector to negative

As financial markets continue their upheaval due to the coronavirus, U.S. banks are one of the many areas left dealing with the impact. Moody's SVP of Financial Institutions Group Joseph Pucella joins Yahoo Finance Live to share their outlook on the banking sector.

Video Transcript

MYLES UDLAND: All right, welcome back, everybody, to Yahoo Finance Live. Myles Udland here in New York. We're joined now by Joe Pucella. He is a senior vice president of financial institutions at Moody's.

Joe, thanks for joining the program. And I guess let's just start with your guys' outlook right now for the financial sector, given what we know so far about how the coronavirus downturn, I guess, has impacted the banking sector. We expect there will be more, but based on what we know, how do you guys see the space?

JOSEPH PUCELLA: So we recently changed our outlook on the US banking sector to negative from stable. And that, as you mentioned, reflects the strain of the coronavirus on the operating environment, and in turn, how that will impact bank asset quality and profitability.

MYLES UDLAND: And so you guys have been-- you know, you had a stable rating on it since 2013. So this is a seven-year-- I guess the question would be in terms of that process, is this, you know, for the banks, has this taken a step back overnight? And is this going to reset the way that a lot of these institutions were thinking about their position, you know, especially given where we were just a couple months ago.

JOSEPH PUCELLA: Yeah, I think, you know, coming into this year, banks were in a relatively strong position. This certainly will affect asset quality. And we'll see the impact beginning in the first quarter as banks report on a couple of weeks profitability will be hammered because we'll see provisions rise. And along with the Fed interest rate cuts, that will certainly affect their net interest margins, which will come down.

So certainly, some pain that will come in the next couple of quarters. But I think, you know, one of the key strengths of the banking system has relative to other financial institutions is the good funding and liquidity. Banks are essentially funded by deposits, which are stable and sticky. And they have little reliance on wholesale funding like other financial institutions.

MYLES UDLAND: So you mentioned the Fed, and you know, the simplest way, and I think it's probably incorrect, but the simplest way people talk about valuing banks is, you know, you look at the Fed, look at rates, and if rates are lower, it's going to be bad for interest margin, and therefore, worse for banks.

But you know, given the Fed has done so many other things-- they've made so many other announcements-- did any of those other programs help the banking system, or banks specifically, and will it depend on the size of the institution? A lot of that stuff is aimed at non-bank borrowers, aimed at smaller businesses. But do some of these smaller regional banks that have less capital available, are they potential beneficiaries from this program? How does the Fed fit in here?

JOSEPH PUCELLA: Yeah, I think, you know, all banks and all financial institutions will benefit from the Fed's actions in that anything that benefits the ultimate client, which would be the consumer or businesses, is going to help the bank's performance. So certainly, that will help cushion the blow.

But you know, the hit from this, you know, this crisis will be pretty severe. And so, you know, that support from the Fed won't be enough to completely eliminate all the risk that that's being created.

MYLES UDLAND: And then just finally, when you look at the financial sector right now, is there a big divide between the health of the bigger banks and the smaller banks, depending on what sort of regulations you had to follow ahead of this? Or when you guys look at the sector, is it kind of everyone's in the same position right now, considering how quickly everything went from, you know, kind of 100 to 0 here?

JOSEPH PUCELLA: Yeah, certainly the banks that have strong capital positions are better positioned to withstand stress. Most banks, as I mentioned, have pretty strong reliance on deposits, so they're kind of in a similar situation.

Certainly, banks that have more concentrations, too, those will affect those sectors that will be most affected. For example, oil and gas, maybe hospitality, leisure, retail. Those banks maybe, you know, we could position in the banks that maybe have a more diversified portfolio.

MYLES UDLAND: All right, Joe Pucella is with Moody's. Thank you so much for dialing in here. And hopefully, we'll talk to you soon about the outlook for where banks are going to go from here as this thing starts to unfold.