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Fitch Cuts Bank of America Debt Outlook as Credit Woes Loom

The rating agency issues a report indicating it won't upgrade the bank's debt as a credit crunch sets in.

Ratings agency


on Tuesday trimmed its outlook for

Bank of America

(BAC) - Get Bank of America Corp Report

debt as worries about credit quality continued to hit the banking sector.

Fitch said it changed its outlook on the bank's long-term obligations to stable from positive, after the bank's recent third-quarter

earnings statement. That report predicted sharp rises in charge-offs for bad loans and in levels of nonperforming assets, which are loans that are past due but haven't been charged off yet. Bank of America shares rose fractionally Tuesday to $39.62.

Last week, bank stocks sold off on the news that Bank of America and

First Union


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likely would be

hurt by exposure to a large syndicated loan. The

Philadelphia Stock Exchange/KBW Bank Index

, which tracks the performance of the nation's 24 largest banks, lost 5% in the latest week.

David King, director of Fitch, said the recent change just means an upgrade of Bank of America's debt rating is less likely, though he points out that it's still a "very highly rated bank." In the note, Fitch points out that amid an environment of deteriorating credit quality, Bank of America hasn't fared worse than its peers but "has not been able to distinguish itself from its peers in a positive light either," a point that it said formed the basis for the change in outlook. "They don't have the momentum in operating results that they did when we rated them a positive," said King.

James Bradshaw, bank analyst at

D.A. Davidson

in Portland, Ore., said the move isn't unusual, especially considering the current backdrop for credit quality. He says Bank of America had been ahead of some other banks in terms of credit quality, but recently has begun to regress a bit. With the recent announcement, "Their asset quality has moved to more of an average level," says Bradshaw. (He rates the stock a buy and his firm hasn't done any underwriting for Bank of America.)

Bradshaw said he expects the deterioration in the bank's credit quality to continue in the upcoming fourth quarter as well as in the first quarter of 2001. But he said he sees stabilization after that.

And in some respects, Fitch may be late to the table with its latest call on Bank of America. In a report published nearly two months ago,

Moody's Investor Service

said it didn't believe the company would be able to "escape the industrywide trend toward worsening asset quality, margin pressure" and volatility in trading and venture capital units. At that time, it affirmed a stable outlook on the bank's credit rating.