European sovereign debt concerns and economic woes are hitting banks’ credit quality, says Fitch Ratings.

In a new report, the rating agency says that the number of bank rating downgrades more than doubled to 33 in the second quarter, with 40% of them due either to negative rating actions that were taken on the Spanish and Greek sovereigns, or to asset quality and earnings challenges facing banks due to the tough economic conditions in these countries.

The total number of negative rating actions, including changes to negative watch and negative outlook, rose to 42 in the quarter from 29 in the first quarter, Fitch says. At the same time, the number of positive rating actions declined to 41, from 90.

“After the financial sector seemed to have stabilized, signs of stress re-emerged, particularly in Europe,” says Gerry Rawcliffe, managing director in Fitch’s Financial Institutions team. “The fiscal costs of the crisis and recession have been greater than expected, and the creditworthiness of several peripheral European sovereigns came under greater scrutiny and market pressure sooner than anticipated.”

Globally, 73% of Fitch’s bank ratings continue to have stable outlooks, just over 16% have negative outlooks, and 4% boast positive outlooks. In the Unitedted and Canada, 32% of banks are on negative outlook, Fitch added, compared with 19% in Europe, 9% in Asia and 7.1% in central and Latin America. The proportion of banks rated investment grade remained largely unchanged at just over 75%.

IE