Moody’s Downgrades UK Banking Outlook

The outlook for the UK banking system has been changed to negative from stable, according to a report from Moody’s Investors Service.

The credit ratings agency (CRA) said that the change reflects its view that the improved operating environment and banks’ stable financial fundamentals won’t be enough to offset the negative credit implications of the finalisation of the UK resolution and bail-in regime and the related ‘ring-fencing’ framework.

The report, entitled
‘Banking System Outlook: United Kingdom’
, focuses on the rating factors impacting the six largest rated UK institutions, which account for 93.6% of active current accounts.

“The key driver of the change in outlook to negative for the UK banking system is that the UK government is now able to finalise the secondary legislation to implement the structural reforms relating to the UK resolution and bail-in regime and the related ring-fencing framework,” said Carlos Suarez Duarte, a Moody’s vice president – senior analyst and author of the report.

The report notes that the UK resolution and bail-in regime and the structural ring-fencing of systemically important retail/small and medium-sized enterprise [SME] deposit-taking entities are designed to prevent the use of taxpayer funds to support failed institutions and to facilitate the going-concern loss-absorption of creditors, including senior unsecured bondholders.

In addition to the resolution and bail-in regime, UK banks also face continued exposure both to conduct and litigation charges and to other costs that might constrain profitability and erode capital for some banks.

“However, against the backdrop of the finalisation of structural reforms, we expect the standalone baseline credit assessments (BCAs) of most UK banks to remain stable because of the country’s stronger economic growth prospects, improving asset quality and capital ratios, stable funding and liquidity metrics and strengthening profitability and efficiency ratios,” said Suarez Duarte.

The improved credit fundamentals of most UK banks – mainly asset quality, earnings and capital – put them in a stronger position to withstand unexpected shocks, such as a house price correction. “In addition, a gradual increase in interest rates over the next two to three years, in line with our central forecast, will also help reduce the risk of a correction by dampening mortgage loan growth while also improving some banks’ profitability metrics,” added Suarez Duarte.

The report follows a complaint this week by
HSBC chairman Douglas Flint
about ‘unprecedented’ regulatory reform.

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