U.S. Banking On The Edge: Fitch Signals Potential Downgrade Following Moody's Actions

Not even 10 days after Moody's downgraded the ratings of 10 U.S. banks, another of the world's three major credit rating agencies - Fitch is ringing alarm bells for the U.S. banking sector, as they have indicated that dozens of U.S. banks are at risk of a rating downgrade, including industry giant JPMorgan Chase.

 

On Tuesday, Fitch analyst Chris Wolfe, during an interview, mentioned that if the Federal Reserve maintains high-interest rates for an extended period, it would pressurize the profit margins of the banking sector and potentially lead to another collective downgrade for the U.S. banking industry.

 

In fact, Fitch already downgraded the rating for the U.S. banking sector from AA to AA- in June due to the regulatory loopholes exposed by Silicon Valley Bank's collapse in March as well as the uncertainty around the Fed's rate hike trajectory. However, this move went unnoticed.

 

Now, if Fitch downgrades the industry again to A+, this would cause a dilemma in that the overall sector rating would then be lower than some individually higher-rated banks. Since a bank's rating can't exceed that of its industry, this possible downgrade from Fitch would mean that the ratings of the country's two largest asset banks, JPMorgan Chase and Bank of America, would be forced downward.

 

"If we were to move it to A+, then that would recalibrate all our financial measures and would probably translate into negative rating actions," Wolfe said. He further indicated that this time, Fitch aims to signal the market. Although a downgrade isn't guaranteed, the risk is real.

 

Wolfe also remarked that if the ratings of top financial institutions like JPMorgan are lowered, Fitch might need to consider downgrading all institutions of the same category. This move could potentially push some smaller, lower-rated banks closer to non-investment grade.

 

During the interview, Wolfe stressed that the primary factor driving Fitch's potential downgrade is the future trajectory of the Federal Reserve's interest rates. Some market perspectives believe that the Fed's rate hikes have reached their peak and that there might be rate cuts next year. However, this isn't definite. If inflation doesn't cool down as expected, the Federal Reserve might continue its rate hikes, keeping interest rates elevated for an extended period, further pressuring the banking sector's profitability.

 

As a result, such large-scale downgrades could certainly have unpredictable impacts. Analysts say that the market's reaction indicates that the U.S. banking sector remains vulnerable, echoing the panic triggered by the collapse of several mid-sized lending institutions earlier this spring, leading to bond devaluations, investor jitters, deposit withdrawals, and rising costs. This year, the KBW Nasdaq Bank Index dropped by 13%, while, in the same period, the S&P 500 index surged by 17%.

 

In fact, the previous warning from Moody's and their subsequent negative actions against 27 banks already caused major U.S. bank stocks to plunge by 4% for a moment, so it would not be hard to imagine what the section will look like if Fitch follows the track.