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What happened

After a strong July, buoyed by better-than-expected second-quarter earnings reports, banks generally cratered in August. Three of the biggest losers were Citigroup (NYSE: C), PNC Financial Services (NYSE: PNC), and M&T Bank (NYSE: MTB). Citigroup was down 13.4% in August, while PNC fell 11.8% and M&T Bank dropped 10.6% last month, according to S&P Global Market Intelligence.

These stocks all trailed the major indexes, as the S&P 500 dropped 1.6%, the Dow Jones Industrial Average plunged 2.4%, and the Nasdaq Composite was off 1.7% in August.

So what

All three of these banks also underperformed the KBW Nasdaq Bank index, which tracks the 24 largest banks in the U.S., but not by much. For August, the index was down 7.9%, so it was a bad month overall for banks.

One of the major catalysts for the drop for these three banks was the news on Aug. 7 that credit ratings agency Moody’s had downgraded 10 regional banks by one notch each and put several others on warning. One of those 10 banks that was downgraded was M&T Bank. PNC was not downgraded, but its outlook fell from stable to negative.

Moody’s cited several factors for the downgrades, including high interest rates, the current economic environment, and asset quality risks, particularly related to commercial real estate.

“Meanwhile, many banks’ Q2 results showed growing profitability pressures that will reduce their ability to generate internal capital. This comes as a mild U.S. recession is on the horizon for early 2024 and asset quality looks set to decline from solid but unsustainable levels, with particular risks in some banks’ commercial real estate (CRE) portfolios,” Moody’s analysts wrote in a research note.

There was also news from Fitch Ratings one week later on Aug. 15. Analyst Chris Wolfe said dozens of banks could be downgraded, including large banks, if the firm downgrades the banking industry’s rating another notch.

In June, Fitch downgraded the industry to A+ from AA-. If conditions warrant another drop, that would trigger Fitch to reevaluate ratings of more than 70 banks.

Now what

Obviously, ratings downgrades and potential downgrades need to be taken seriously, but keep in mind that all three of these stocks are dirt cheap already, each trading below book value and each with price-to-earnings ratios in the single digits.

Also, these downgrades are mostly for regional banks. Although M&T Bank is on the downgrade list, it is the 16th-largest U.S. bank, so it is different from the other nine smaller banks. Thus, these banks are more stable and should be able to weather the near-term uncertainty.

All three of these stocks have great dividends, as well, with PNC and Citigroup yielding over 5% with payout ratios below 41%, while M&T Bank has a yield of 4% with a payout ratio of just 30%. They all remain good dividend stocks.

As for their long-term prospects, I think all three are solid stocks, but given the near-term uncertainty, they might be best to monitor through the third quarter.

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Citigroup is an advertising partner of The Ascent, a Motley Fool company. Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Moody’s and PNC Financial Services. The Motley Fool has a disclosure policy.

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