Rating agency Fitch is warning that it may downgrade dozens more U.S. banks, including JPMorgan Chase (JPM), which is the world’s biggest lender with $3 trillion U.S. of assets.
The ratings agency lowered its assessment of the U.S. banking industry’s health in June of this year, a move that went largely unnoticed by financial markets because it didn’t trigger downgrades on any banks at that time.
But Fitch says another one-notch downgrade of the industry’s score, to A+ from AA-, would force it to reevaluate ratings on each of the more than 70 U.S. banks it covers, including major lenders such as JPMorgan Chase and Bank of America (BAC).
Recently, rival ratings agency Moody’s (MCO) downgraded 10 small and mid-sized U.S. banks and warned that cuts could come for another 17 lenders.
Earlier this month, Fitch downgraded the U.S. long-term credit rating because of political dysfunction in Washington, D.C., and growing debt concerns.
This time, Fitch is intent on signaling to the market that bank downgrades, while not a foregone conclusion, are a real risk moving forward.
The firm’s June reduction took the industry’s “operating environment” score to AA- from AA because of pressure on the country’s credit rating, regulatory gaps exposed by regional bank failures this past spring, and future uncertainty around interest rates.
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 country’s two largest banks by assets, JPMorgan Chase and Bank of America, would likely have their ratings cut to A+ from AA- in that scenario since banks can’t be rated higher than the environment in which they operate.
Should institutions such as JPMorgan Chase and Bank of America have their ratings lowered, Fitch would then be forced to consider downgrades on all their peer institutions, a move that could potentially push some weaker American lenders to non-investment grade status.
U.S. stock futures fell into negative territory on news that Fitch may further lower its ratings on American banks, with the Dow Jones Industrial Average declining more than 200 points.
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