JPMorgan and Bank of America — the country’s two largest banks — could have their credit ratings downgraded by Fitch, one of its analysts has warned.
The move, in turn, could trigger the downgrade of dozens of other U.S. banks the beginning of a new banking crisis, according to a new one report from CNBC.
U.S. bank stocks fell after the warning on Tuesday morning, as share prices of both JPMorgan and Bank of America were down about 2.5 percent by midday. Smaller banks also felt the heat. Western Alliance was down about 3 percent.
Fitch Ratings is an agency that ranks banks based on their leverage and likelihood of default. It also assesses the health of the US banking sector as a whole.
That is what the head of the US banks of the organization, Chris Wolfe, said CNBC an attack on individual banks may be necessary as the broader assessment of the banking environment became increasingly gloomy.
The move to a downgrade of two of the biggest players could in turn lead to a downgrade of dozens of other US banks and the start of a new banking crisis.
Fitch Ratings is an agency that ranks banks based on their leverage and likelihood of default, as well as assessing the health of the US banking industry. In June, it downgraded the banking sector rating from AA to AA-
In June, Fitch downgraded the banking sector from AA to AA-. Wolfe said that move went largely unnoticed because it didn’t require a downgrade in bank ratings.
But if the industry’s rating were to drop another notch to A+, it would impact individual banks, as there can be no banks with a higher rating than the environment in which they operate, Wolfe said.
“Moving it to A+ would recalibrate all of our financial metrics and likely translate into negative rating action,” he told CNBC.
Fitch’s head of US banks in North America, Chris Wolfe (pictured), told CNBC that any downgrades from the banks would reflect the health of their “business environment”
The score Fitch has given the industry cannot be lower than that of some of its top-rated lenders.
In terms of assets under management, JPMorgan and Bank of America are the two largest banks in the country and both have the highest credit ratings issued to banks by Fitch, AA-.
They are joined by two other firms, Bank of New York Mellon and State Street. At the level below are Morgan Stanley and Wells Fargo, followed by the rest of the country’s banks.
If the country’s leading institutions were downgraded, Fitch would be forced to consider downgrading other banks as well, Wolfe said.
AA ratings indicate ‘very high credit quality’ and indicate that the agency considers the probability of default to be ‘very low’, while a rating of A indicates ‘high credit quality’ where the risk of default is only ‘low’ ‘ is.
BBB ratings are considered “good,” according to Fitch’s rating definitions.
The downgrade earlier this month was attributed to regional bank failures in March and interest rate uncertainty. Some business executives disapproved, including JPMorgan CEO Jamie Dimon, who told CNBC it was “ridiculous” but also claimed it “doesn’t really matter.”
In a statement earlier this month, the rating agency said: “According to Fitch, there has been a steady deterioration in governance standards over the past 20 years.”
It justified the downgrade by arguing that the country’s finances are likely to decline due to growing debt and political turmoil.
Bank shares of JPMorgan fell more than 2.5 percent Tuesday morning after a report from CNBC that Fitch could downgrade its AA rating
Moody’s downgraded the credit ratings of 10 US regional banks last week and announced it was reviewing a possible downgrade of six larger banks. Pictured is signage outside the Manhattan headquarters
Recent downgrades by Fitch have coincided with more cynical assessments of the health of the economy by other rating agencies as well.
Last week, Moody’s downgraded the credit ratings of several regional US banks and warned it may also downgrade some of the country’s largest lenders.
In a note explaining the rating action, Moody’s analysts cited higher interest rates as a result of the Federal Reserve’s inflation struggles, as well as a looming “mild recession” and “increasing pressure on banks’ profitability”.
In total, the agency downgraded the credit ratings of 10 smaller banks, placed six others on downgrade assessment, and reaffirmed the ratings of 11 other banks, but placed them at “negative outlook.”