BofA, Citi Hit by Fitch Downgrades

Updated from 2:22 p.m. EST

Fitch Ratings on Friday downgraded Bank of America's (BAC Quote) and Citigroup's (C Quote) individual ratings and preferred shares to junk status, as the banks face increasing pressure from mounting losses and the souring economy.

BofA and Citi, each of whom have sold $45 billion preferred equity stakes to the Treasury Department through the Troubled Asset Relief Program and had billions more in illiquid assets guaranteed by the federal government, could just be the first in a string of downgrades from the ratings agency, as it applies new criteria for evaluating banks in receipt of bailout funds.

A report issued by Fitch on Wednesday says that risk of deferral on preferred stock has greatly increased as a result of the current crisis. The report refers to capital infusions in the banks over recent quarters that have provided a buffer against weakened earnings.

"While the additional capital is helpful in some respects, the additional debt service burden created heightens the risk for these entities as well," the report says. "[T]he high level of government support ... complicates and, indeed, potentially materially increases the risk that coupons on hybrid instruments will be deferred."

James Moss, a managing director of Fitch's financial institutions group, said that decisions on other "major, systemically important banks," are currently in the committee stage.

"As much as the list will be relatively short, it's going to involve names that you've heard of," he says.

Other large financial institutions that have received preferred equity injections under the Treasury Departments' Troubled Asset Relief Program include JPMorgan Chase (JPM Quote), Goldman Sachs (GS Quote), Morgan Stanley (MS Quote), Wells Fargo (WFC Quote) and US Bancorp (USB Quote).