S&P Global has revised the prospects of five regional banks in the United States from stable to negative. This downgrade is attributed to the potential risks associated with commercial real estate (CRE).

What Happened: The outlooks of First Commonwealth Financial (NASDAQ:FCF), M&T Bank (NYSE:MTB), Synovus Financial (NYSE:SNV), Trustmark (NASDAQ:TRMK), and Valley National Bancorp (NASDAQ:VLY) were downgraded by S&P Global, according to a Reuters report. Their heightened exposure to CRE loans justified this move.

The downgrade has sparked concerns amongst investors regarding the banking sector's stability. "The negative outlook revisions reflect the possibility that stress in CRE markets may hurt the asset quality and performance of the five banks," stated S&P Global.

This decision follows New York Community Bancorp's (NYSE:NYCB) unexpected quarterly loss earlier this year, which resulted from provisions on bad CRE loans. The news triggered a sell-off in US regional banking shares.

Investors are apprehensive that the combination of rising borrowing costs and low occupancy rates for office spaces in the post-COVID-19 era may lead to more lenders facing losses due to loan defaults. In addition, the banking sector is grappling with the increasing cost of retaining deposits in the face of high-interest rates.

Interestingly, S&P Global also expressed a negative outlook for nine US banks, constituting 18% of those rates. Most of these downgrades were due to significant CRE exposures.

Why It Matters: This decision by S&P Global resonates with the warning issued by the Federal Reserve Chair, Jerome Powell, earlier on March 8, 2024.

In a statement, Powell cautioned regional banks about potential failures due to risks associated with commercial real estate loans. He emphasized that the banking sector could witness more such failures, thereby corroborating S&P Global's concerns. This has made the banking sector's future uncertain, leading to heightened vigilance among investors.