Fitch warns that it may have to downgrade dozens of banks

a Fitch Ratings An analyst warned that the US banking industry has developed closer To another source of turmoil — the risk of an overall ratings downgrade of dozens of US banks that might even include the likes of JPMorgan Chase.

The rating agency snapped appreciation From the health of the industry in June, that analyst’s move Chris Wolf He said it went largely unnoticed because it did not cause a downgrade of the banks’ credit rating.

Downgrading one more notch to the industry grade, to A+ from AA-, would force Fitch to reevaluate the ratings for each of the more than 70 US banks it covers, Wolff told CNBC in an exclusive interview at the company’s New York headquarters.

“If we were to move it to an A+, that would recalibrate all of our financial measures and potentially translate into negative rating actions,” Wolff said.

The credit rating companies that bond investors rely on have recently roiled the markets with their actions. Last week, Moody’s downgraded 10 small and medium-sized banks and warned that downgrades could come for 17 more lenders, including larger institutions such as Truist and US Bank. Earlier this month, Fitch downgraded the United States’ long-term credit rating due to political dysfunction and a growing debt burden, a move derided by business leaders including JPMorgan CEO Jamie Dimon.

This time around, Wolff said, Fitch is intent on signaling to the market that bank cuts, while not a foregone conclusion, are a real risk.

June of the company an act It earned the industry’s “Operating Environment” score to AA- from AA due to pressure on the country’s credit rating, regulatory gaps exposed by regional bank failures in March and uncertainty about interest rates.

The problem with another downgrade to A+ is that the industry grade will then be lower than some of the higher rated lenders. The nation’s two largest banks by assets, JPMorgan and Bank of America, would likely be downgraded to A+ from AA- in this scenario, as the banks cannot be rated higher than the environment in which they operate.

And if major institutions like JPMorgan are laid off, Fitch will at least have to consider downgrading all of its peers, according to Wolff. This may push some of the weaker lenders closer to non-investment grade status.

BankUnited in Miami Lakes, Florida, for example, is located at BBB, already at the lower end of what investors consider investment grade. If a company, which has a negative outlook, falls into another notch, it will be dangerously close to a non-investment rating.

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

“We’ll have some decisions that we make, both on an absolute and a relative basis,” Wolf said. “On an absolute basis, there may be some BBB banks where we’ve already discounted a lot of things and maybe they can keep their rating.”

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

In terms of what could prompt Fitch to downgrade the industry’s credit rating, the biggest factor is the path of interest rates set by the Federal Reserve. Some market forecasters said that the Fed may have already finished raising interest rates and may cut them next year, but this is not a foregone conclusion. Higher rates for longer than expected would put pressure on industry margins.

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

A related issue, Wolf said, is whether industry loan defaults are rising beyond what Fitch considers a historically normal level of losses. Defaults tend to rise in a rising interest environment, and Fitch Ratings has expressed concern about the impact of office loan defaults on smaller banks.

“It shouldn’t be shocking or alarming,” he said. But if we go beyond [normalized losses]This is what might lead us.”

It is difficult to predict the impact of such broad cuts.

In the wake of the recent downgrades at Moody’s, Morgan Stanley analysts said that downgraded banks will have to pay investors more to buy their bonds, further compressing profit margins. They even expressed fears that some banks might shut themselves out completely in the debt markets. A downgrade can also lead to unwelcome provisions in lending agreements or other complex contracts.

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