BAC - U.S. banks may see more credit downgrades if environment weakens Fitch says

2023-08-15 07:58:34 ET

A Fitch Ratings analyst has warned that dozens of U.S. banks's credit ratings, including at some of the nation's biggest lenders, are at risk, though it's not a foregone conclusion, according to a media report.

In June, Fitch lowered U.S. banks' operating environment score to 'aa-' from 'aa,' due to pressure on the U.S. sovereign rating, "gaps in the regulatory framework, and structural uncertainty around the normalization of monetary policy," it said.

While that, in itself, doesn't require the downgrade of individual bank ratings, a further operating environment score cut to 'a+' would force Fitch to reevaluated the ratings on the more than 70 banks it covers, Fitch analyst Chris Wolf told CNBC.

The SPDR S&P Bank ETF ( KBE ) fell 1.5% in Tuesday premarket trading. JPMorgan Chase ( JPM ) slipped 1.2% and Bank of America ( BAC ) dropped 1.6% .

"If we were to move it to 'a+', then that would recalibrate all our financial measures and would probably translate into rating actions," he said.

That cautious comment comes a week after Moody's downgraded a number of small and mid-sized banks and placed six larger lenders on review for downgrade. Earlier this month, Fitch downgraded the U.S.'s long-term credit rating one notch to AA+, partly blaming erosion of governance.

If the U.S. banks operating environment score were lowered, that would likely trigger a downgrade of the two largest U.S. banks by assets, JPMorgan Chase ( JPM ) and Bank of America ( BAC ), the CNBC report said. That's because, under Fitch's criteria, banks can't be rated higher than the environment in which they operate.

If those biggest, and highest rated, banks are cut, the ratings company would have to at least consider downgrades on the ratings of their peers, he said. Consequently, weaker lenders could fall closer to non-investment grade status.

The biggest factor that would spark a downgrade is the path of interest rates, Wolfe said , as higher rates for longer than anticipated would weigh on industry profit margins.

More on Banks, Regulation and Interest Rates:

• Fed's Daly says more work needed to get inflation to target
• U.S. regulators propose increasing capital requirements for large U.S. banks
• Federal Reserve may be ready to hold rates steady for awhile, Philly Fed's Harker says
• 'It's possible' Federal Reserve will hike at September meeting: Powell press conference

For further details see: