Fitch Ratings analyst Christopher Wolfe has reduced his firm’s operating environment score for U.S. banks to aa- from aa due to the unknown path of interest rate hikes and regulatory changes facing the sector, according to a Thursday statement.
Fitch issued a statement on the move, which took place in June. It isn’t a credit rating action.
Wolfe cited “structural uncertainty around the path and rate of monetary tightening and gaps in the regulatory framework” for the lower score, while saying the failure of three U.S. banks earlier this year put a focus on bank vulnerabilities, including asset-liability mismatches.
The outlook on the firm’s aa- operating environment score is stable, with little or no expectation that it will be cut at any time in the medium term.
Fitch’s operating environment score for banks is different from its credit ratings. The score looks at the challenges banks might face from labor trends, trade and investment, logistics and crime and security, but it also can be impacted by other factors, including regulations and the macroeconomic backdrop. Credit ratings, by contrast, can impact a bank’s borrowing costs.
Fitch would consider a further operating environment rating cut in the face of additional uncertainty around the macro environment, failure by banks to address regulatory gaps, or high private-sector indebtedness and a higher-for-longer interest rate scenario.
Banks stocks are rising on Thursday, with the KBW Nasdaq Bank Index
BKX,
up by 0.6%, the S&P Regional Banking exchange-traded fund
KRE,
up by 0.4% and the Financial Select SPDR ETF
XLF,
up by 0.2%.
Separately, JPMorgan Chase analyst Vivek Juneja said criticized loans that show preliminary signs of higher risk have been on the rise in the wake of a “sharp weakening of office commercial real estate loans.”
U.S. Bancorp
USB,
had the highest increase in criticized loans in the second quarter with a rise of 44%, while Citizens Financial Group
CFG,
has the highest criticized loan ration at 10.2% of commercial loans.
