Ratings agency Moody's upgrades UK banking sector outlook

Canary Wharf Moody's said the UK's economic outlook was stabilising

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Credit ratings agency Moody's has upgraded its outlook for the UK banking industry to stable from negative.

It said the change reflected the country's increasingly stable economic outlook, despite low growth prospects.

"Unemployment has not increased as much as in previous recessions, thereby contributing to a stabilisation in banks' asset quality," the statement said.

Moody's expects profitability to recover from current low levels.

Other reasons given for the more positive outlook were the continued improvement in the banks' capital as a result of new, stricter regulation.

"Overall, we believe that UK banks are sufficiently well capitalised to absorb expected losses from both our central and adverse stress scenarios," Moody's said.

"Once the large UK banks execute their capital plans to address the additional capital buffer requirements recently imposed by the Prudential Regulation Authority (PRA), Moody's believes that UK banks will be well capitalised for the risks they face and will compare favourably to their European peers."

The PRA recently told UK lenders to raise £27.1bn more in capital to cover their risks, with Royal Bank of Scotland the regulator's main cause of concern, accounting for £13.6bn of the total.

Although the ratings agency predicted that banks' profits would recover, it warned that low interest rates, as well as the cost of implementing new regulation, could hurt profitability and lead to some one-off charges.

The ratings agency said that the enforcing of the new rules would continue to create uncertainty, but that they would reduce systemic risk in the long term.

The negative outlook on the long-term debt and deposit ratings of the UK large banks was maintained. Moody's said this was because of the stated aim of UK authorities to avoid using taxpayer money to support banks in the future.

The European Union is also introducing rules that look to impose losses on creditors rather than taxpayers if a bank were to get into trouble.

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