Credit rating downgrades drove US bank stock returns toward negative territory in August.

The median return of major exchange-traded banks for the month was negative 7.2%, swinging from positive 13.1% in July and positive 6.2% in June, according to S&P Global Market Intelligence data. The S&P US BMI Banks index's return was negative 8.7%, while the S&P 500's return was negative 1.6%.

During the month, Moody's downgraded banks, citing "sources of strain" on the banking sector, and S&P Global Ratings lowered the ratings of five banks after its review of risks relating to funding, liquidity and asset quality, particularly in the office commercial real estate sector. A Fitch Ratings analyst said the agency would be forced to reevaluate its ratings on more than 70 banks if there is another one-notch downgrade of the industry's score, CNBC reported.

The S&P US BMI Banks index returned negative 1.60% on Aug. 8, the day after the Moody's downgrades; negative 6.29% on Aug. 15, when the CNBC report was posted; and negative 9.97% on Aug. 22, the day after the S&P Global Ratings downgrades.

In a note released after the Moody's and Fitch news, Hovde Group analyst Ben Gerlinger said there was nothing new in connection with the awareness of funding costs and profitability pressures for the banking industry.

"If anything, the recent news seems to be fodder for technical traders to take [short-term] profits off an overbought daily tape," Gerlinger wrote in an Aug. 17 note.

Negative sentiment continues to be the biggest challenge for most mid-cap banks, reinforced by Moody's downgrades and Fitch's "follow-on threat," according to Wells Fargo analyst Jared Shaw.

"The environment remains more conducive to trading vs. holding, but long-term value remains," Shaw wrote in an Aug. 16 note.

Worst-performing stocks

Four of the best-performing bank stocks by total return in July were among the worst performers in August. One of them was West Reading, Pa.-based Customers Bancorp Inc., which ranked second on the worst-performers list with a return of negative 16.3% for August.

The three other banks were Wilmington, NC-based Live Oak Bancshares Inc. and Fishers, Ind.-based First Internet Bancorp, which each returned negative 14.6%, and Jeffersonville, Ind.-based First Savings Financial Group Inc., with a negative 13.7% return.

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Mansfield, Pa.-based Citizens Financial Services Inc. was the worst-performing bank stock, returning negative 22.3%.

Beverly Hills, Calif.-based PacWest Bancorp was also part of the list as it returned negative 14.4%. On July 31, D.A. Davidson analyst Gary Tenner upgraded his call on the company's shares to "buy" from "neutral" to align with the rating on its merger partner, Santa Ana, Calif.-based Banc of California Inc.

Best-performing stocks

The best-performing US bank stock for August was Bristol, Pa.-based William Penn Bancorp., with a return of 12.3%.

Moorefield, W.Va.-based Summit Financial Group Inc., which announced its proposed merger of equals with Alexandria, Va.-based Burke & Herbert Financial Services Corp. during the month, ranked second with a 9.0% return.

Merger partners Camp Hill, Pa.-based LINKBANCORP Inc. and Salisbury, Md.-based Partners Bancorp were part of the ranking with returns of 6.2% and 6.6%, respectively.

HomeStreet Inc. was among the best performers with a 3.7% return. The Seattle-based company is reportedly exploring its strategic options, including a capital raise, asset sales or a whole-bank sale, Bloomberg News reported Aug. 1.