Fitch Warns That Even JPMorgan Isn’t Immune to Downgrading

America’s banking sector is creeping closer to a wide-ranging downgrade.

That’s according to Fitch Ratings analyst Chris Wolfe, who told CNBC Tuesday (Aug. 15) that such a downgrade could even touch seemingly untouchable giants like JPMorgan Chase.

Wolfe said Fitch lowered its assessment of the banking sector’s health in June, though it didn’t trigger downgrades on banks.

However, lowering the industry’s score, to A+ from AA-, would force Fitch to reexamine ratings on all of the banks it covers.

“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.

As CNBC notes, credit rating firms like Fitch and Moody’s have shaken up investors in recent weeks, with Moody’s last week downgrading 10 small and midsized banks and Fitch lowering the U.S.’s credit rating.

Asked what could cause Fitch to lower its rating of the banking sector, Wolfe said it will depend on what happens with interest rates.

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

There’s also the issue of loan defaults, and whether they’ll climb beyond what Wolfe’s agency deems a normal level of losses.

As noted here earlier this month, banks are reporting the highest loan losses in three years, as lenders deal with rising defaults among credit card users and commercial real estate borrowers.

Gerard Cassidy, banking analyst at RBC Capital Markets, told the Financial Times (FT) the loan losses represent a swing back to normality after the pandemic, when banks “became accustomed to very strong quality.”

The FT report said that a number of banks are making provisions for loan losses in case unemployment creeps from its current 3.5% level to 5%.

“What could take them to levels that the market is not expecting and the bank stocks would react unfavorably to?” asked Cassidy. “You would have to come up with what I would call a hard landing for the economy where unemployment reaches somewhere north of 7%.”

Last month brought the news that just over half the banks in the U.S. had tightened the terms for commercial and industrial loans.

“Drill down a bit, and the banks are also looking to tighten standards through at least the rest of the year,” PYMNTS wrote. “Perhaps no surprise, the respondents cited a ‘less favorable’ and ‘more uncertain’ economic outlook as key considerations in tightening those standards. The banks also cited a deterioration in their own liquidity positions.”