After Moody's, Is Fitch Next To Downgrade US Banks Ratings? Find Out!

US banking stocks were battered after reports hinted that Fitch Ratings is the next in line to downgrade dozens of lenders. It is likely that some of the big lenders such as JP Morgan and Bank of America are on the downgrade risk. Such comes after Moody's Investors Services trimmed the ratings of ten US banks while putting six big lenders on downgrade watch and giving a negative outlook on a total of 11 lenders. The US banking crisis has hinted at nerve-wrecked traders on worries of a possible recession.

On Tuesday, Bank of America's share price dived by 3.2% after market hours, while Wells Fargo & Co plunged over 2.3%, and JPMorgan Chase dipped by 2.6%. Also, Citigroup and Morgan Stanley shed over 2% and 1.3% respectively. In the mid-size basket, the Western Alliance Bancorporation listed on NYSE nosedived by nearly 7% before ending at $48.90 down by 4.12%. Further, the PacWest Bancorp settled with a drop of nearly 4%.

Banking stocks took a massive beating after Chris Wolfe, an analyst at Fitch Ratings in an exclusive interview with CNBC that another one-notch downgrade of the industry's score, to A+ from AA-, would force Fitch to reevaluate ratings on each of the more than 70 US banks it covers.

In the interview, Wolfe pointed out that if Fitch were to move it to A+, then such would recalibrate all of its financial measures and would probably translate into negative rating actions. However, he pointed out that Fitch is intent on delivering the message that bank downgrades, although not a foregone conclusion, is a real risk.

The names of big lending giants like JPMorgan and Bank of America were mentioned and they are most likely to face a rating downgrade to A+ from AA- in this scenario.

In June, while lowering US banks' operating environment (OE) score to 'aa-' from 'aa', Fitch said that this reflected downward pressure on the U.S. sovereign rating, gaps in the regulatory framework and structural uncertainty around the normalization of monetary policy. Fitch did say that the lower OE score is not expected to negatively impact the ratings of U.S. banks, although it reduces rating headroom.

Earlier, this month, Moody's Investors Service said, US banks continue to contend with interest rate and asset-liability management (ALM) risks with implications for liquidity and capital, as the wind-down of unconventional monetary policy drains systemwide deposits and higher interest rates depress the value of fixed-rate assets. Meanwhile, many banks' Q2 results showed growing profitability pressures that will reduce their ability to generate internal capital.

Moody's report highlighted that this comes as a mild US recession is on the horizon for early 2024 and asset quality looks set to decline from solid but unsustainable levels, with particular risks in some banks' commercial real estate (CRE) portfolios.