Lenders may face downgrade in ratings agency reassessment

CREDIT rating agency Moody’s may cut its rating on 14 British lenders, including Lloyds and Royal Bank of Scotland, because British regulators appear less willing to bail out banks in the future.

The companies which could be downgraded by Moody’s include Santander’s British operations, Bank of Ireland UK, Co-operative Bank, and Nationwide Building Society, the agency said. Moody’s said the move had been widely expected.

“The reassessment is not driven by either a deterioration in the financial strength of the banking system or that of the Government,” said Elisabeth Rudman, a Moody’s Senior Credit Officer and lead analyst for a number of UK banks.

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”It has been initiated in response to ongoing guidance from the UK authorities (the Bank of England, the Financial Services Authority and the Treasury) that banks that fail in the future should not expect capital injections from the public purse.”

Moody’s also said Coventry Building Society, Newcastle Building Society, Norwich & Peterborough Building Society, Nottingham Building Society, Principality Building Society, Skipton Building Society, West Bromwich Building Society and Yorkshire Building Society, were at risk of being cut.

Among Britain’s other listed banks, the rating agency kept a “negative” outlook on HSBC’s ratings and cut guidance for future Barclays ratings moves to “negative” from “stable.”

Canaccord Genuity analyst Cormac Leech said the Moody’s statement was not that surprising given moves by regulators around the world to avoid a repeat of the credit crisis, when taxpayers had to step in to rescue troubled banks.

Moody’s had already said in April that it could downgrade Britain’s smaller banks as it assessed how they would fare without a tacit understanding that the Government would always bail them out if they got into trouble.

Regulators and politicians across Europe are drawing up reforms that would allow some banks to fail in future, in a move to avoid a repeat of government bailouts of 2008 that cost taxpayers billions of euros.

Proposals drawn up by the European Commission could provide a framework for bank failures in future, including making senior bondholders or investors holding the highest ranking forms of bank debt, take losses.

In Britain, the Government has set up an Independent Commission on Banking (ICB) to look into how to make the banking sector safer and more competitive and how to deal with banks considered too big to fail.

In an interim report in April, the ICB said the top banks should ring-fence their retail arms from riskier trading operations and hold more capital to protect taxpayers from future crises.

Moody’s analyst Ms Rudman said the ICB’s investigation which is due to be concluded by September, was one of several macroeconomic and regulatory uncertainties affecting UK banks, and she kept a “negative” outlook on the sector as a whole.

“In many ways, the banks are in better shape than they were before the credit crisis, but it’s still a very difficult environment,” Ms Rudman said. Andrew Bailey, an executive director at the Bank of England, said earlier this month: “It’s quite natural that if they have created ratings on the basis of an assumption of Government support, that will have to change as globally authorities adopt policies that end the reliance of banks on such support.

“But it has to happen in a stable fashion. Messy attempts to downgrade financial institutions on a piecemeal basis – different institutions at different times – cannot be tolerated. This needs to be a sensible process.”

Iain Cornish, the chief executive of Yorkshire Building Society, said: “These changes by Moody’s are part of a sector review which reflects a change in Moody’s methodology rather than a change to the financial position of the institutions affected.”

A Skipton Building Society spokesman said: “The potential that we could be downgraded alongside most of the other institutions rated by Moody’s is clearly disappointing. However, we are working with the ratings agency to ensure they understand the inherent financial strength of our diversified group model and factor this into their decision-making processes.”