16-8-2023 (NEW YORK) Fitch Ratings issued a warning on Tuesday, indicating that numerous U.S. banks, including the country’s largest bank, JPMorgan, could face significant rating downgrades. In June, Fitch had already lowered its “operating environment” rating for U.S. banks from AA to AA-, citing concerns over the country’s credit rating, regulatory gaps exposed by regional bank failures in March, and uncertainty surrounding interest rates, as explained by a Fitch analyst in an interview with CNBC.
The initial downgrade went largely unnoticed as it did not trigger any immediate downgrades for individual banks, according to analyst Chris Wolfe. However, if the U.S. banking industry’s score were to experience another one-notch downgrade, from AA- to A+, Fitch would be compelled to reassess the ratings of over 70 U.S. banks, including JPMorgan. This could potentially push weaker institutions closer to non-investment-grade status.
Another factor of concern is the possibility of loan defaults within the banking industry surpassing what Fitch deems a historically normal level of losses, as highlighted by Wolfe. Loan defaults tend to increase in an environment of rising interest rates, and Fitch has expressed particular apprehension regarding the impact of office loan defaults on smaller banks.
Following Fitch’s warning, shares of several lenders, including JPMorgan, Bank of America, and Citigroup, experienced a decline on Tuesday.
The underlying cause of Fitch’s warning lies in the restrictive monetary policies implemented by the Federal Reserve over the past 18 months, as reported by Business Insider. Expensive borrowing costs and stricter lending standards have created a challenging environment for many banks and non-bank businesses burdened with substantial corporate debts.
Just last week, Moody’s downgraded the credit ratings of ten small and mid-sized U.S. banks and placed major lenders such as Bank of New York Mellon, Northern Trust, and U.S. Bancorp under review for potential downgrades.
Earlier this month, Fitch downgraded the long-term credit rating of the United States, citing political dysfunction and escalating debt levels.
This time, Fitch aims to signal to the market that while bank downgrades are not inevitable, they pose a significant risk, emphasized Wolfe.
