Fitch warns it may be forced to downgrade dozens of banks, including JPMorgan Chase

A Fitch Ratings Analyst warns US banking industry is in decline near Another source of turmoil – the risk of a sharp downgrade in the ratings of dozens of US banks, which could also include banks such as Bank of America. JPMorgan Chase,

rating agency cut it assessment The analyst’s take on the health of the industry in June chris wolfe This went largely unnoticed as it did not bring down the ratings of the banks.

But a one-notch drop in the industry score, from AA- to A+, would force Fitch to re-evaluate ratings on each of the more than 70 US banks it covers, Wolff said in a special briefing at the firm’s New York headquarters. told CNBC in an interview.

“If we move it to A+, it will reset all of our financial measures and potentially translate into negative rating actions,” Wolff said.

Credit rating firms trusted by bond investors have created a stir in the market recently with their actions. Last week, Moody’s downgrade 10 small and medium-sized banks warned that there could be cuts for another 17 lenders, including large institutions truest And us bank, Earlier this month, Fitch downgrade The long-term credit rating of the US was one such step due to political dysfunction and rising debt burden. derided by business leaders including JP Morgan CEO Jamie Dimon,

This time, Wolff said, Fitch intends to signal to the market that a bank rating downgrade, although not a foregone conclusion, is a real risk.

June of the firm action Under pressure on the country’s credit rating, the industry’s “operating environment” score was moved from AA to AA- in March due to regulatory gaps highlighted by the regional bank. failures and uncertainty about interest rates.

The problem posed by another downgrade to A+ is that the industry’s score would be lower than some of its top-rated lenders. The country’s two largest banks by assets, JP Morgan and Bank of AmericaIn this scenario, it would likely be downgraded from AA- to A+, as banks cannot be rated higher than the environment in which they operate.

And if top institutions like JPMorgan make the cut, Fitch will be forced to consider downgrading the ratings of at least all of its peers, according to Wolff. This could potentially push some vulnerable lenders closer to non-investment-grade status.

Shares of lenders including JP Morgan, Bank of America and City Group The fall on Tuesday came amid a broader market decline. KBW Bank Index also fell.

tough decision

For example, located in Miami Lakes, Florida bankunitedAt BBB, it is already at the lower end of what investors consider investment grade. If the company, which has a negative outlook, drops another notch, it will be dangerously close to a non-investment-grade rating.

Wolff said he does not want to speculate about the timing of this potential move or its impact on lower-rated companies.

“We have to make some decisions, both on an absolute and a relative basis,” Wolff said. “On an absolute basis, there may be some BBB- banks where we’ve already downgraded a lot of things and they may be able to retain their ratings.”

JPMorgan declined to comment for this article, while Bank of America and BankUnited did not immediately respond to messages seeking comment.

rates, defaults

In terms of what could prompt Fitch to downgrade the industry, the biggest factor is the path of interest rates set by the Federal Reserve. some markets economy has said the Fed could raise rates already and cut them next year, but that’s not a foregone conclusion. Higher rates will put pressure on industry profit margins for longer than expected.

“We don’t know where the Fed stops? Because that’s going to be a very important input into what that means for the banking system,” he said.

A related issue, Wolff said, is whether the industry’s loan defaults rise above historically normal levels of losses by Fitch. Defaults increase in a rate-hiking environment and Fitch has expressed concern over the impact of office loan defaults on smaller banks.

“It shouldn’t be shocking or worrying,” he said. “But if we’re crossing the line [normalized losses]Maybe that’s what suggests to us.”

It is difficult to predict the impact of such a widespread decline.

In view of the recent Moody’s downgrade, Morgan Stanley analysts Said Downgraded banks would have to pay investors more to buy their bonds, which would further reduce profit margins. He also expressed concern that some banks may be completely ousted from the loan market. Downgrades can also introduce unwanted provisions in loan agreements or other complex contracts.

“It is not inevitable that it will go down,” Wolff said. “We can stay at AA- for the next 10 years. But if it goes down, there will be consequences.”

Correction: This article has been updated to correct that the KBW Bank Index does not trade in the premarket.

Fitch warns of possible rating downgrades of several major US banks

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