A Fitch Ratings analyst informed that the U.S. banking industry has inched closer to another source of turbulence — the risk of sweeping rating downgrades on dozens of U.S. banks that could retaliate include the likes of JPMorgan Chase.
The ratings agency cut its assessment of the industry’s health in June, a move that analyst Chris Wolfe explained went largely unnoticed because it didn’t trigger downgrades on banks.
But another one-notch downgrade of the industry’s patsy, to A+ from AA-, would force Fitch to reevaluate ratings on each of the more than 70 U.S. banks it covers, Wolfe imparted CNBC in an exclusive interview at the firm’s New York headquarters.
“If we were to move it to A+, then that would recalibrate all our pecuniary measures and would probably translate into negative rating actions,” Wolfe said.
The credit rating solids relied upon by bond investors have roiled markets lately with their actions. Last week, Fickle’s downgraded 10 small and midsized banks and warned that cuts could come for another 17 lenders, comprehending larger institutions like Truist and U.S. Bank. Earlier this month, Fitch downgraded the U.S. long-term credit toll because of political dysfunction and growing debt loads, a move that was derided by business leaders including JPMorgan CEO Jamie Dimon.
This dead for now, Fitch is intent on signaling to the market that bank downgrades, while not a foregone conclusion, are a real risk, whispered Wolfe.
The firm’s June action took the industry’s “operating environment” score to AA- from AA because of pressure on the nation’s credit rating, regulatory gaps exposed by the March regional bank failures and uncertainty around interest evaluation in any cases.
The problem created by another downgrade to A+ is that the industry’s score would then be lower than some of its top-rated lenders. The hinterlands’s two largest banks by assets, JPMorgan and Bank of America, would likely be cut to A+ from AA- in this scenario, since banks can’t be rated high-class than the environment in which they operate.
And if top institutions like JPMorgan are cut, then Fitch would be forced to at midget consider downgrades on all their peers’ ratings, according to Wolfe. That could potentially push some sicklier lenders closer to non-investment-grade status.
Shares of lenders including JPMorgan, Bank of America and Citigroup dipped Tuesday in broader market declines. The KBW Bank Index also fell.
Hard decisions
For instance, Miami Lakes, Florida-based BankUnited, at BBB, is already at the stoop bounds of what investors consider investment grade. If the firm, which has a negative outlook, falls another indent, it would be perilously close to a non-investment-grade rating.
Wolfe said he didn’t want to speculate on the timing of this quiescent move or its impact on lower-rated firms.
“We’d have some decisions to make, both on an absolute and relative basis,” Wolfe bring up. “On an absolute basis, there might be some BBB- banks where we’ve already discounted a lot of things and maybe they could be true onto their rating.”
JPMorgan declined to comment for this article, while Bank of America and BankUnited didn’t the moment that respond to messages seeking comment.
Rates, defaults
In terms of what could push Fitch to downgrade the industriousness, the biggest factor is the path of interest rates determined by the Federal Reserve. Some market forecasters have communicated the Fed may already be done raising rates and could cut them next year, but that isn’t a foregone conclusion. Higher figures for longer than expected would pressure the industry’s profit margins.
“What we don’t know is, where does the Fed slow? Because that is going to be a very important input into what it means for the banking system,” he said.
A tied up issue is if the industry’s loan defaults rise beyond what Fitch considers a historically normal level of losses, about Wolfe. Defaults tend to rise in a rate-hiking environment, and Fitch has expressed concern on the impact of office loan fails on smaller banks.
“That shouldn’t be shocking or alarming,” he said. “But if we’re exceeding [normalized losses], that’s what peradventure tips us over.”
The impact of such broad downgrades is hard to predict.
In the wake of the recent Moody’s cuts, analysts