The number of negative rating actions on banks globally almost doubled in the fourth quarter, says Firtch Ratings, and the rating agency expects that the negative rating trend will continue in 2009.

In a special report published Friday, Fitch said it took 266 negative rating actions in the fourth quarter of 2008 compared with 135 in the third quarter. The majority of the increase was due to emerging markets where negative rating actions quadrupled, it says. Overall, there were 105 downgrades (up from 57 in Q3) and just six upgrades (down from 23 in Q3). The ratio of negative to positive outlooks also increased to 9.6 at the end of Q4 from 1.8 at the end of Q3.

“Overall, the short- to medium-term outlook is likely to remain difficult for financial institutions in many economies due to lower interest rates, less revenue-generating opportunities and pressure to de-leverage. There remains a focus on capital adequacy in credit markets globally, especially due to the severe recession forecast for the world economy,” it says.

Also Friday, Fitch downgraded certain ratings on both Bank of America (BAC) and Citigroup.

Regarding BAC, Fitch noted the significant loss it reported in Q4, and its recent acquisition Merrill Lynch & Co. posting a massive US$15 billion loss. It says that the firm “is facing significant performance pressures throughout 2009”.

Fitch says it expects performance pressures at both BAC and Merrill to continue throughout 2009. “BAC faces higher expected losses in its home equity loan, credit card portfolio, and may also face higher losses in its commercial loan book. For both Merrill and BAC, the U.S. government’s loss cap guarantee reduces the long tail risk on a U.S. portfolio of US$118 billion. However, BAC faces the potential for additional mark to market charges in legacy Merrill assets not protected by the U.S. Treasury loss cap guarantee, as well as potential market value losses on its 10% first loss portion of the guaranteed pool of assets. As a result of these pressures, Fitch expects loss provisions and mark to market charges to remain elevated throughout 2009,” it says.

Additionally, Fitch’s downgrade of certain Citi ratings “reflects current and expected financial performance challenges”, it says.

“Citi recorded massive losses in the fourth quarter and faces the prospect of surging asset quality problems globally,” it notes. Fitch adds that it recognizes Citi’s efforts in building up its loan loss reserves and reducing problematic exposures across many different categories. “Nevertheless, global economic difficulties are causing the inflow of new problems ranging from U.S. and international consumer exposures to large corporate exposures. Consequently, provisioning needs are expected to remain quite elevated for 2009. The U.S. government’s loss cap guarantee reduces the long tail risk on a U.S. portfolio of approximately US$300 billion. That said, Citi’s first loss exposure of US$30 billion (above existing reserves) remains sizeable,” it says.

IE