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Market Extra: Bank ETFs head for worst day in 3 months after credit downgrades, warnings rattle sector

U.S.-listed exchange-traded funds that buy bank stocks fell on Tuesday, after Moody’s Investors Service late said it put a handful of major U.S. banks on review for a possible downgrade and lowered debt ratings on several small and midsize banks.

The SPDR S&P Regional Banking ETF KRE, which tracks an equal-weighted index of U.S. regional bank stocks, fell 3.2% on Tuesday, on pace for its biggest one-day percentage drop since May 4, while the Invesco KBW Regional Banking ETF KBWR was off 3.8%, on track for its largest percentage decrease since May 2, according to Dow Jones Market Data. 

Deep Dive: 10 regional banks expected to buck a weak industry trend

The SPDR S&P Bank ETF KBE tumbled 3.3%, while the Invesco KBW Bank ETF KBWB slumped 3%, putting both funds on track for their worst day in over three months, according to FactSet data. 

See: Moody’s places credit ratings of 6 major U.S. banks on review for downgrade

In a statement released late Monday, Moody’s said the U.S. banking industry, rattled in March by the sudden collapse of Silicon Valley Bank and other regional lenders, “continues to contend with interest rate and [asset and liability management] risks with implications for liquidity and capital.” 

“Many banks’ Q2 results showed growing profitability pressures that will reduce their ability to generate internal capital,“ the credit-ratings firm said. Meanwhile, a “mild recession looms and asset quality looks set to decline” particularly in some banks’ commercial real-estate portfolio. 

Shares of M&T Bank Corp. MTB, -2.59%, BOK Financial Corp. BOKF, -2.29% and Commerce Bancshares Inc. CBSH, -1.93% — among the small- to midsize U.S. banks Moody’s downgraded — were all down nearly 3% in Tuesday trading. 

Moody’s put U.S. Bancorp USB, -0.90%, State Street STT, -2.37%, Bank of New York Mellon BK, -1.97%, Northern Trust Corp. NTRS, -2.55%, Cullen/Frost Bankers Inc. CFR, -2.82%, and Truist Financial Corp. TFC, -2.79% on review for potential downgrades.

See: Moody’s places credit ratings of 6 major U.S. banks on review for downgrade

Other bank shares also broadly underperformed the three major stock averages on Tuesday. Big banks such as Bank of America Corp. BAC, -2.53% eased 3.3%, and Goldman Sachs GS, -2.27% was off 3.1%. Shares of the U.S. Bancorp USB, -0.90% fell 2%, while the State Street Corp. STT, -2.37% dropped 2.6% and the Bank of New York Mellon Corp. BK, -1.97% was off 2.4%, according to FactSet data.

U.S. stocks traded broadly lower on Tuesday with the S&P 500 index SPX down 1.1% after getting a short respite from last week’s selloff on Monday. The Dow Jones Industrial Average DJIA dropped 357 points, or 1%, to 35,113, and the Nasdaq Composite COMP fell 1.3%, according to FactSet data.

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