U.S. banks could be greatly affected if contagion continues to spread beyond the stressed European markets (Greece, Ireland, Italy, Portugal, and Spain), according to Fitch Ratings.
Net Exposures Manageable: Large U.S. banks have been reducing direct exposure to stressed markets for well over a year. Overall, net exposure appears manageable but not without financial costs. Aggregate net exposure to these markets totaled approximately $50bn at 3Q11 for the six largest U.S. banks (Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, Goldman Sachs and Morgan Stanley). Exposure averaged 0.5% of total assets and less than 9% of Tier 1 common capital (T1C).
Exposure to Italy and Spain: Exposure to stressed markets is believed to be generally concentrated in larger markets, notably Italy and Spain. Although Fitch Ratings views the direct exposures to Spain and Italy as manageable, the broader ramifications of distress in these markets will have meaningful consequences beyond direct exposure if not contained.
Fitch believes that, unless the eurozone debt crisis is resolved in a timely and orderly manner, the broad outlook for U.S. banks will darken. Currently, Fitch’s rating outlook for the U.S. banking industry is stable, reflecting improved fundamentals at most banks, coupled with generally lower ratings versus pre-crisis levels.
Risks Increasing: The risks of a negative shock are rising and could alter Fitch’s stable rating outlook for U.S. banks. Fitch’s base case rating assumption underpinning bank ratings is that eurozone sovereign debt concerns will be dealt with in an orderly fashion, i.e. there will not be a disorderly debt restructuring or forced exit of any country from the euro.