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

TO Fitch Ratings analyst warned that the US banking industry has inched near to another source of turmoil: the risk of drastic ratings downgrades for dozens of US banks that could even include entities like JPMorgan Chase.

The rating agency cut its assessment of the industry’s health in June, a move that the analyst Chris Wolfe This went largely unnoticed because it did not trigger downgrades on the banks.

But another one-notch downgrade in the industry’s rating, from AA- to A+, would force Fitch to reassess the ratings on each of the more than 70 US banks it covers, Wolfe told CNBC in an exclusive interview at headquarters. of the firm in New York.

“If we were to move it to A+, that would recalibrate all of our financial measures and likely result in negative rating actions,” Wolfe said.

The credit rating firms that bond investors trust have been rocking the markets of late with their actions. Last week, Moody’s degraded 10 small and medium-sized banks and warned that cuts could occur for 17 other lenders, including larger institutions such as truist and US Bank. Earlier this month, Fitch degraded the long-term credit rating of the US due to political dysfunction and a growing debt burden, a move that was ridiculed by business leaders, including the CEO of JPMorgan jamie dimond.

This time, Fitch intends to signal to the market that bank downgrades, while not a foregone conclusion, are a real risk, Wolfe said.

June signing action raised the industry’s “operating environment” rating to AA- from AA due to pressure on the country’s credit rating, regulatory loopholes exposed by the March regional bank failures and uncertainty around interest rates.

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

And if major institutions like JPMorgan are cut, then Fitch would be forced to at least consider rating downgrades on all its peers, according to Wolfe. That could potentially push some weaker lenders closer to non-investment grade status.

For example, based in Miami Lakes, Florida bancounido, on BBB, is already in the lower bounds of what investors consider to be investment grade. If the company, which has a negative outlook, falls another notch, it would be dangerously close to an investment grade rating.

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

“We would have to make some decisions, both in absolute and relative terms,” ​​Wolfe said. “In absolute terms, there could be some BBB- banks where we’ve already discounted a lot of things and maybe they could maintain their rating.”

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

In terms of what could push Fitch to downgrade the industry, the most important factor is the interest rate path determined by the Federal Reserve. some market forecasters They have said the Fed may already have finished raising rates and could cut rates next year, but that’s not a foregone conclusion. Higher rates for longer than expected would pressure industry profit margins.

“What we don’t know is, where does the Fed stop? Because that will be a very important input in what it means for the banking system,” he said.

A related issue is whether industry loan defaults increase beyond what Fitch considers a historically normal level of losses, Wolfe said. Defaults tend to rise in a rising rate environment, and Fitch has raised concerns about the impact of office loan defaults on smaller banks.

“That shouldn’t be shocking or alarming,” he said. “But if we’re exceeding (normalized losses), that’s what maybe tilts us.”

The impact of these wide cuts is difficult to predict.

Following Moody’s recent cuts, Morgan Stanley analysts saying that downgraded banks would have to pay investors more to buy their bonds, further compressing profit margins. They even expressed concern that some banks could be locked out of debt markets entirely. Downgrades could also trigger unwanted provisions in loan agreements or other complex contracts.

“It’s not inevitable that it will go down,” Wolfe said. “We could be in AA- for the next 10 years. But if it fails, there will be consequences.”