UK financial firms downgraded by Moody's rating agency

 
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Moody's has downgraded the credit rating of 12 UK financial firms including Lloyds TSB, RBS, Nationwide and Santander UK.

The ratings agency said it now believed the government was less likely to support firms that got into trouble.

However, the firm emphasised that the downgrades did not "reflect a deterioration in the financial strength of the banking system".

Moody's also downgraded nine Portuguese banks, blaming financial weakness.

Shares in both Lloyds and RBS were among the FTSE 100's biggest fallers, closing down 3.4% and 3% respectively.

Seven UK building societies were among the firms downgraded, a move that the Building Societies Association (BSA) called a "normalisation" that had "been expected for some time".

"It does not represent any change in financial strength and it is business as usual across the sector," the BSA said.

Analysts and investors watch closely the ratings that firms such as Moody's put on the creditworthiness of companies and governments.

Along with Standard & Poor's and Fitch, Moody's is one of the big three agencies. Their ratings influence heavily the amount interest that companies and governments pay to borrow money.

Reassessment

In a statement, Moody's said: "Moody's Investors Service has today downgraded the senior debt and deposit ratings of 12 UK financial institutions and confirmed the ratings of one institution.

Start Quote

In a sense, the downgrades should be viewed as a good thing, if they reflect a genuine transfer of risk from taxpayers to the banks' creditors”

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"The downgrades have been caused by Moody's reassessment of the support environment in the UK which has resulted in the removal of systemic support for seven smaller institutions and the reduction of systemic support... for five larger, more systemically important financial institutions."

The downgrades include a two-notch cut for government-controlled RBS, to A2 from Aa3, and a cut of one-notch, to A1 from Aa3, for Lloyds TSB, a division of part-nationalised Lloyds Banking Group.

Spanish bank Santander had its UK business downgraded by one notch, to A1 from Aa3, while Nationwide Building Society suffered a two-notch cut, to A2 from Aa3.

Other institutions downgraded were Co-operative Bank, and the building societies Newcastle, Norwich & Peterborough, Nottingham, Principality, Skipton, West Bromwich and Yorkshire.

The rating cuts did not concern HSBC, Barclays or Standard Chartered, Moody's said.

RBS said it was "disappointed" that Moody's announcement did not reflect the "significant progress" the bank had made to restructure it finances.

"We do, however, see the removal of implicit government support for the UK banking sector as being a necessary and important step forward as the sector returns to standalone strength," RBS said in a statement.

Lloyds said that it believed Moody's was reflecting what was already understood in the market, and that it would "have minimal impact on our funding costs".

Nationwide said that Moody's announcement was part of an industry-wide review, and "not a reflection of Nationwide's business model".

The building society said in a statement: "Nationwide remains one of the strongest and best capitalised financial organisations in the UK".

Government steps
Crisis jargon buster
Use the dropdown for easy-to-understand explanations of key financial terms:
AAA-rating
The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is minuscule.

The Chancellor, George Osborne, said one reason for the downgrades was that the government was seen to be "trying to deal with the too-big-to-fail problem".

He told the BBC: "One of the reasons they're doing this is because they think the British government is actually moving in the direction of trying to get away from guaranteeing all the largest banks in Britain.

"People ask me how are you going to avoid Britain and the British taxpayer bailing out banks in the future? This government is taking steps to do that.

"Therefore credit rating agencies and others will say, well actually these banks have got to show they can pay their way in the world."

Mr Osborne said he was confident that British banks were well-capitalised. "They are not experiencing the kinds of problems that some of the banks in the eurozone are experiencing at the moment."

Over-reaction?

Moody's split the downgrades into three categories.

Banks with a "high likelihood of support" are RBS and Lloyds.

Banks or building societies with a "moderate or high likelihood of support" are Nationwide, Santander UK, Co-operative Bank, and Clydesdale Bank. Clydesdale's rating was reaffirmed, not cut.

George Osborne: "They think the British government is actually moving in the direction of trying to get away from guaranteeing all the largest banks in Britain"

Institutions with a "low or no likelihood of support" included the following building societies: the Newcastle, Norwich & Peterborough, Nottingham, Principality, Skipton, West Bromwich and Yorkshire.

Analysts warned against over-reacting to the downgrades.

Max King, a portfolio manager at Investec Asset Management, said: "People are getting a little paranoid about the UK banking sector.

"It doesn't have the same exposure to sovereign default and devaluation risk as the rest of Europe. It does have exposure to Ireland, but that is a eurozone country which appears to be doing best in the crisis," he said.

And Ralph Silva, banking analyst at SRN, said the downgrades were "an over-reaction", but he added that the government will probably have to provide further support for RBS by the end of the year.

Portugal move

Moody's also cut its rating on nine Portuguese banks.

"The key driver for the downgrades of most banks' debt and deposit ratings is Moody's assessment of the deterioration of their unsupported financial strength," said the ratings agency.

Moody's said it expected a further deterioration of the banks' domestic asset quality due to a weak economic growth outlook and government austerity measures, and liquidity strains due to a lack of access to wholesale funding.

The firm said if recapitalisation and deleveraging plans for the banks were successful they would help to restore confidence in them.

"However, Moody's believes that these plans face significant implementation risks," it said.

 

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  • rate this
    +3

    Comment number 123.

    If everything moves down a grade, does that not just revalue the grades - ie if the best all move from AAA to AAA-, does AAA- not just become the new AAA?

  • rate this
    +1

    Comment number 122.

    Does this ever stop or have we watch that further until they´ve ruined the financial market entirely by their downgrading rampage?

    It´s unbelievable what great deal of power these rating agencies have taken.

  • rate this
    +3

    Comment number 121.

    I am afraid to say these rating agencies are absolutely useless. I have conducted financial reviews into some companies with good ratings that were bankrupt several years ago. Furthermore, 80% of the population have adverse credit info on their record. What does this tell us?

  • rate this
    0

    Comment number 120.

    Headlines six months from now : impoverished Greeks join third world ranks, European banks post huge returns on their Greek investments, bonuses soar, German children face large cuts on education due to large German debt.

  • rate this
    +1

    Comment number 119.

    @99. wirral18

    My point is valid. Nearly every country followed Brown's model. If Northern Rock had collapsed then my guess is we would have seen a total collapse of the banking industry.

    --

    Your point isn't valid, it is just opinion based on your political viewpoint. Don't be an ideological sheep, read up on the subject and form your own opinions based on the facts.

  • rate this
    +2

    Comment number 118.

    We all know we're in a steaming pile but we don't need these agencies unnecessarily panicking the living daylights out of people. We're all in this together but some are more in it together than other, isn't that right Messrs Osbourne & Cameron?! They'll still have their salaries & pensions no matter what happens to the rest of us- they'll see to that. Time to cut a hole in the mattress me thinks!

  • rate this
    +10

    Comment number 117.

    I wonder how many Hedge Funds / Investors have made money off the back of this announcement ??

    I wonder how many of these people have 'friends' at Moody's ??

    Another great scam from the world of finance.

    10 / 10.

    Net growth for society (or for that matter the economy too) = ZERO

  • rate this
    -1

    Comment number 116.

    As Usual: No expert on these affairs. However, surely the downgrade for that reason will make banks realise that they don't have a safety net to fall back on. That the government won't be held to ransom by the bankers greed.

  • rate this
    0

    Comment number 115.

    Mightily relieved that I don't understand any of this, including the 'jargon buster' section, which is still crammed full of jargon.

  • rate this
    +4

    Comment number 114.

    Don't forget, these are the same ratings companies that rated CDO's and synthetic CDO's as AAA. Their grasp of risk is somewhat better than before but in the world of micro economics their ability to model exposure and probability of default needs to be investigated and understood as much as other banking institutions.

  • rate this
    +1

    Comment number 113.

    Not all those who work in the Financial Services sector are highly paid and can afford for their employers to fail. Reading people's ill informed commentary on these types of threads, with little or no appreciation of how a bank is structured in terms of base salary and bonus' are desperate for banks to go bust is just terrible. I include Preston in this group as well.

  • rate this
    +3

    Comment number 112.

    Argh, will people PLEASE stop going on about bankers' bonuses. Only a small proportion get them, the average banker earns about as much as a tube driver and it's getting really annoying hearing about big bonuses.

    If you READ the article it's about Moody judging UK banks LESS likely to be bailed out, NOT that they're all about to fail. This is what everyone wanted, STOP MOANING!!

  • rate this
    +9

    Comment number 111.

    It is very difficult to understand why, when the majority of the world is working to recover the financial situation we are not working as a true team.
    Last week Italy were in trouble financially, their credit rating was downgraded, now it will cost more to recover. The same now with banks, the cost of borrowing just went up. Maybe we need to look at the whole methodology.

  • rate this
    +4

    Comment number 110.

    I for one am slightly bored of people laying into the banks so heavily - that's not to say I don't think the bonuses and wages aren't outrageous, or that they aren't dishonest or that the government shouldn't help them out less. HOWEVER the UK banking sector is worth a fortune to this country annually generating in excess of £90 billion per year pre recession. You can't just let that waste away.

  • rate this
    0

    Comment number 109.

    Good, about time. The banks casino divisions have to be hived of, then they can be allowed to fail.

  • rate this
    +1

    Comment number 108.

    Moody's explanation is:The Gov. "is more likely now to allow smaller institutions to fail if they become financially troubled." And Peston thinks this is a "good thing"? Not if you have money in those banks, surely. Even if them going under is slight, that's more than most people would be prepared to risk with their savings.

  • rate this
    0

    Comment number 107.

    I am remembered say ex-PM Tony Blair still not join to the euro currency was in December 1999, I know why this happened horrible in Greece can put up to £54 billion debt. Why is the collapse Lehman Brothers Investment bank victim. I was saying big four different banks Barclay's, HSBC, RBS and Lloyds TSB has a lots horrible again and again. I say to NO join our Euro currency.

  • rate this
    +1

    Comment number 106.

    As a disempowered resident of uk what has this to do with me?
    So some fat cat will profit at my expense - what's new?
    Oh yes - I can wave a bit of paper every decade and "vote".
    Whoopie-doo.

  • rate this
    0

    Comment number 105.

    We all know the bankers havent learnt anything from this ordeal. Even in the US when they received help from their government they all went on holiday!

    Like the article says, the banks also think they are "too big to fail" and think they can carry on doing whatever they want as the government will bail them out on their bad decisions.

    Force them to work on min wage as punishment!

  • rate this
    +1

    Comment number 104.

    Given tehir track record so far, these should be really good investments. I suggest a short dose of the Jerry Pournelle factual article 'The Voodoo Sciences' which points out how often economists get forecasts right. Like all of us these rating agencies and economists have 100% accurate hindsight but never foresight.

 

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