British Banks Get Lower Credit Ratings

Published in Investing on 7 October 2011

Share prices slide after credit-rating agency Moody's downgrades 12 UK banks.

Leading credit-rating agency Moody's (NYSE: MCO.US) has downgraded the credit ratings of a dozen UK banks and financial firms. Predictably, bank share prices fell following this announcement.

The thumbs-down from Moody's

Moody's reason for lowering these firms' credit ratings was 'due to the withdrawal of implied Government support from the banking sector'.

In other words, without explicit, systemic state support for the likes of Lloyds Banking Group (LSE: LLOY) and Royal Bank of Scotland (LSE: RBS), Moody's considers these banks' debts and bonds to be less secure than before.

However, Moody's left the ratings of Barclays (LSE: BARC) and HSBC (LSE: HSBA) untouched. Here's how bank share prices fell following this news (from steepest to shallowest fall):

BankShare price (p)% fall
Royal Bank of Scotland23.53.5
Lloyds Banking Group34.73.3

RBS, which is 83% taxpayer-owned, had its rating cut by two notches, as did Nationwide BS. Lloyds (41% taxpayer-owned) lost one notch, as did Santander UK. 

As well as these two listed banks, Moody's downgraded Nationwide BS and Santander UK, the British arm of leading Spanish bank Banco Santander (NYSE: BNC.US).

Too big to fail?

This suggests that, three years after the collapse of Lehman Brothers in September 2008, Moody's believes the UK government is no longer willing to offer a blanket guarantee to British banks.

In some ways, this is good news, because banks' risks should fall squarely on their shareholders and bondholders and not British taxpayers. If the UK government is moving away from supporting 'too big to fail' banks, then this can be seen as a good thing.

Indeed, it may discourage the bigger banks to accelerate their ongoing programmes to reduce risk and leverage by increasing capital ratios and shrinking balance sheets. This 're-sizing and re-risking' of banks should help to lower the risk of future public bailouts, which is an important step for both banks and the nation.

Three tiers of support

Moody's placed British banks and building societies into one of three categories, as follows:

High likelihood of support
Barclays, HSBC, Lloyds, RBS
Moderate or high likelihood of support
Clydesdale Bank, Co-operative Bank,
Nationwide BS ,Santander UK
Low or no likelihood of support
Newcastle BS, Norwich & Peterborough BS,
Nottingham BS, Principality BS, Skipton BS,
West Bromwich BS, Yorkshire BS

RBS hits back

In many ways, British's biggest banks are much less likely to need capital injections than their European counterparts. This is because they are less exposed to dodgy euro-zone bonds from the likes of Greece and Portugal.

Hence, RBS came out with all guns blazing. In a stock-market announcement this morning, the bank argued that it "has made significant progress in strengthening its credit profile since 2008."

RBS stated that, from 2008 to mid-2011, its loan-to-deposit ratio had fallen from 154% to 114%, and liquidity reserves of £155 billion exceed short-term wholesale funding of £148 billion. Also, non-core assets have fallen by 57% to £113 billion and its Core Tier 1 capital ratio has climbed to 11.1%.

RBS goes on to state that "both Standard & Poor's and Fitch Rating Services have upgraded RBS's stand-alone rating by two notches in the past 18 months."

Even so, RBS's balance sheet is clearly weaker than, say, HSBC's, which is why the global bank enjoys a far higher credit rating than RBS!

More from Cliff D'Arcy:

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BarrenFluffit 07 Oct 2011 , 12:06pm

The markets reaction looks a bit odd. The split of retail and other is pretty well known about and that this affects their credit rating should be no surprise.
RBS / govt are in an interesting pickle. The govt (in reducing their public support) implies capital raising from existing shareholders (i.e themselves). In practise full nationalisation may be cheaper. BBC's business editor explains.

FXEconomist 07 Oct 2011 , 12:21pm

Please list all the institutions down graded if you know. it is not in the Ft

FXEconomist 09 Oct 2011 , 10:54am

Thanks Breelander but it does not list the building societies

RobinnBanks 09 Oct 2011 , 11:46am

STAN does not get a mention (as usual), any reason for that?

morganem23 09 Nov 2011 , 2:17pm

The banks will be back with their begging bowls within the year I reckon and if you have any money in the banks get it out. As for the OAPs moaning about their low interest on their savings. Well what happened to market forces? You guys didn't care when the mines were being closed down because we could get coal cheaper abroad. No you said great, cheap heating and hang the miners. So now you want the nanny state to intervene and put interest rates up so that the rest of the country grinds to a complete halt! In fact you wouldn't have any saving if it were not for Gordon Brown bringing in a guarantee on your saving and you called him fit to burn. When the banks come back for money I hope the goverment tell them on your bike. I bet you when it comes right down to it they won't go bust. But if they do, tough, they have mouthed off about the nanny state interveneing to help people out, so I hope they don't turn to the nanny state, that's you and me, to help them out again.

rjbeech12 26 Mar 2012 , 10:57am

There is no doubt in my mind that we are heading towards a second crunch. The size of the lending market in the payday sector says it all really. If 1 in 10 people are turning to firms like with aprs of nearly 2000% to cover their mortgage payments each month then honestly, how long will it be before the hosung market falls apart again!

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