- Fitch Ratings in June cut its "operating environment" score for the US banking sector.
- Fitch analyst Chris Wolfe told CNBC that another downgrade would mean banking giants like JPMorgan face reevaluations.
A Fitch analyst warned Tuesday that US banking giants, including JPMorgan, could be at risk for a ratings reassessment if the overall industry's score gets hit with another downgrade.
In June, the ratings agency lowered its "operating environment" score for US banks to AA- from AA, citing "downward pressure on the US sovereign rating, gaps in the regulatory framework and structural uncertainty around the normalization of monetary policy."
That cut didn't trigger any downgrades for individual lenders. But analyst Chris Wolfe told CNBC if the sector sees a another one-rung cut, that would lead Fitch to reevaluate ratings for more than 70 US banks, including JPMorgan.
"If we were to move it to A+, then that would recalibrate all our financial measures and would probably translate into negative rating actions," he said.
JPMorgan declined to comment. Shares fell 2% on Tuesday.
Another downgrade to the operating environment would mean that certain banks would be rated higher than their sector, which isn't typical. That would mean banks like JPMorgan and Bank of America that have AA- ratings would likely be downgraded one rung.
In that scenario, Wolfe told CNBC that ratings cuts to industry leaders could spark a reconsideration of other banks, and potentially drag smaller lenders toward non-investment-grade status.
"It's not inevitable that it goes down," he added. "We could be at AA- for the next 10 years. But if it goes down, there will be consequences."
Underpinning the analyst's warning is the restrictive monetary policy that the Fed has imposed over the last 18 months. Expensive borrowing costs as well as heightened lending standards have created a pressure-cooker environment for many banks and non-bank businesses with large corporate debts.
To that point, Moody's slashed the credit ratings on 10 US banks in August and it put major lenders like Bank of New York Mellon, Northern Trust, and US Bancorp under review for potential downgrades. In what amounted to 27 ratings actions in total, the firm also reported a negative outlook for 11 other lenders, including Capital One and Citizens Financial.
"Most banks' deposits were flat or down only modestly, but the mix worsened, with non-interest-bearing deposits declining and banks paying more for deposits," Moody's strategists said in a note. "The resulting drop in net interest income and net interest margins eroded profitability and, thus, the ability to replenish capital internally."
Separately, Fitch slashed the US's credit rating at the start of the month, citing rising debts and an "erosion of governance."